(a) Derive the equilibrium in this economy without an intermediary bank. How much would people invest in the storage technology if they are risk-neutral? How would your answer change if you assume instead that agents are risk averse, so they prefer less variance for the same expected return? (25%) (b) Derive the equilibrium with a bank, assuming the bank operates under perfect com- petition (no profits). Assume also that the bank does not expect a bank run to occur. What is the advantage of pooling risk? (25%) (c) What is the outcome in case of an (unexpected) bank run, assuming that the bank equally splits the value of its portfolio among all depositors? (25%) (d) Compare and rank outcomes from points a., b. and c., both in terms of ex-ante expected consumption (before agents are revealed whether they are early or late consumers) and ex-post actual consumption for early and late consumers. (25%)
(a) Derive the equilibrium in this economy without an intermediary bank. How much would people invest in the storage technology if they are risk-neutral? How would your answer change if you assume instead that agents are risk averse, so they prefer less variance for the same expected return? (25%) (b) Derive the equilibrium with a bank, assuming the bank operates under perfect com- petition (no profits). Assume also that the bank does not expect a bank run to occur. What is the advantage of pooling risk? (25%) (c) What is the outcome in case of an (unexpected) bank run, assuming that the bank equally splits the value of its portfolio among all depositors? (25%) (d) Compare and rank outcomes from points a., b. and c., both in terms of ex-ante expected consumption (before agents are revealed whether they are early or late consumers) and ex-post actual consumption for early and late consumers. (25%)
Chapter8: Productivity And Growth
Section: Chapter Questions
Problem 1.2P
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