Skip to main content

Communication Barriers in the Diamond-Dybvig Model: The Sequential-Service Constraint and Other Implications

Working Paper 370 | Published September 1, 1987

Download PDF

Author

photo of Neil Wallace

Neil Wallace

Communication Barriers in the Diamond-Dybvig Model: The Sequential-Service Constraint and Other Implications

Abstract

The Diamond-Dybvig model of banking (Journal of Political Economy, 1983) is amended by introducing communication barriers—these being implicit in their model and in most explanations of why people hold so-called liquid assets. These barriers imply the sequential-service constraint that Diamond and Dybvig imposed on private intermediation and have other implications: infeasibility of the policy that Diamond and Dybvig identify with deposit insurance and desirability of dependence of the realized return on deposits on the random order of withdrawals.