Consider the Diamond-Dybvig model of bank runs as discussed in the course. Assume that the utility function is given by U(c) = √c and that the parameter values are R = 4, p = 1/3, and π = 2/5.
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Consider the Diamond-Dybvig model of bank runs utility function is given by U(c) = √c and that the parameter values are R = 4, discount factor ß = 1/3, and π = 2/5
A) How much do type-1 agents and type-2 agents consume in periods 1 and 2 under autarky, i.e., if there are no banks, insurance companies, or markets? What is the ex-ante expected utility that they derive in this scenario?
How much do type-1 agents and type-2 agents consume in periods 1 and 2 in the "good" banking equilibrium? What is the ex-ante expected utility that they derive in this scenario?
How many agents are able to execute their claims in period 1 (i.e., withdraw the maximum amount they have been promised) in the bank run equilibrium?
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