Optimal liquidity provision through a demand deposit scheme : the Jacklin critique revisited

Abstract

We derive conditions such that optimal liquidity provisions through a demand deposit scheme can be sustainably implemented in a subgame perfect Nash equi- librium under the assumption that renegade investors have free access to ex-post asset markets. As our qualitative main nding we demonstrate that such sus- tainability is more likely for poor than for rich scheme participants in terms of future income. By establishing sustainability for low future income popula- tions, our formal analysis therefore o¤ers an important quali cation of Jacklin s (1987) in uential claim that an optimal demand deposit scheme is not sustainable whenever there exists the possibility of an ex-post asset market.