In a dynamic model of moral hazard, competition can undermine prudent bank behavior. While capital-requirement regulation can induce prudent behavior, the policy yields Pareto-inefficient outcomes. Capital requirements reduce gambling incentives by putting bank equity at risk. However, they also...

Capital requirements are traditionally viewed as an effective form of prudential regulation - by increasing capital the bank internalizes more of the risk of its investment decisions. While the traditional view is accurate in the sense that capital requirement can be effective in combating moral...

This paper surveys the main policy debates on financial sector development. It provides a framework for understanding the main functions of the financial system, emphasizing informational problems and their efficient resolution through accumulation of reputational capital and the development of...

This paper asks the question under what circumstances banks have incentives to increase the deposit collection, when the deposit market is not fully penetrated, i.e. when there is low financial depths. We compare outcomes under a perfectly competitive deposit market with outcomes under financial...