Working Paper 576

Implementing Efficient Allocations in a Model of Financial Intermediation

Edward J. Green | Senior Policy Advisor, Federal Reserve Bank of Chicago
Ping Lin

Published October 1, 1996

In a finite-trader version of the Diamond-Dybvig (1983) model, the symmetric, ex-ante efficient allocation is implementable by a direct mechanism (i.e., each trader announces the type of his own ex-post preference) in which truthful revelation is the strictly dominant strategy for each trader. When the model is modified by formalizing the sequential-service constraint (cf. Wallace, 1988), the truth-telling equilibrium implements the symmetric, ex-ante efficient allocation with respect to iterated elimination of strictly dominated strategies.

Published In: Journal of Economic Theory (Vol. 109, No. 1, March 2003, pp. 1-23)

Download Paper (pdf)