In the Diamond-Dybig banking model, suppose that, instead of a bank, consumers can trade shares in the production technology. That is, each consumer invests in the production technology in period 0. Then, if the consumer learns that he or she is an early consumer in period 1, he or she can either interrupt the technology or can sell their investment at a price p. A consumer who learns that he or she is a later consumer in period 1 can purchase shares in investment projects at a price p, and can interrupt his or her production technology in order to acquire the goods required to buy shares.
(a) Determine what p is in equilibrium, and what each consumer's quantity of early and late consumption is, in a diagram like Figure.
(b) Do consumers do better or worse than they would with a banking system? Do they do better than they would with no banks and with no trading in shares?

  • CreatedDecember 05, 2014
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