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The existing banking literature leaves largely unanswered the question: what is the viability of bank liquidity provision if investors can dynamically readjust their portfolios? To address this question, I analyze the problem of optimal liquidity provision through bank deposit contracts in a simple continuous-time equilibrium model under uncertainty. My model introduces the possibility of investors' directly investing in the market, which gives rise to a moral hazard problem in the use of deposit contracts. I argue that this can severely restrict liquidity provision and characterizes incentive-compatible deposit contracts as second-best mechanisms to provide liquidity. The analysis shows that at the optimum, liquidity provision is negatively correlated with the degree of irreversibility of the market investment opportunity. In particular, when the market investment opportunity is completely reversible, deposit contracts cannot provide any insurance against liquidity risks.Journal of Economic LiteratureClassification Numbers: D 51, D 92, G 20, G 21.

The paper develops a simple model of corporate ownership structure in which costs and benefits of ownership concentration are analyzed. The model compares the liquidity benefits obtained through dispersed corporate ownership with the benefits from efficient management control achieved by some degree of ownership concentration. The paper reexamines the free-rider problem in corporate control in the presence of liquidity trading, derives predictions for the trade and pricing of blocks, and provides criteria for the optimal choice of ownership structure.

The recent financial crisis has shown that short-term collateralized borrowing may be a highly unstable source of funds in times of stress. In this paper, we develop a dynamic equilibrium model and analyze under what conditions such instability can be a consequence of market-wide changes in expectations. We derive a liquidity constraint and a collateral constraint that determine whether such expectations-driven runs are possible and show that they depend crucially on the microstructure of particular funding markets that we examine in detail. This provides insights into the differences between the tri-party repo market and the bilateral repo market, which were both at the heart of the recent financial crisis.

[This article integrates the problem of designing corporate bankruptcy rules into a theory of optimal debt structure. We show that, in an optimal contracting framework with imperfect renegotiation, having multiple creditors increases a firm's debt capacity while increasing its incentives to default strategically. The optimal debt contract gives creditors claims that are jointly inconsistent in case of default. Bankruptcy rules are therefore a necessary part of the overall financing contract, to make claims consistent and to prevent a valuereducing run for the assets of the firm. We characterize these rules, with predictions about the allocation of security rights, the right to trigger bankruptcy, and the symmetry of treatment of creditors in default.]

Enrico C. Perotti, Ernst-Ludwig von Thadden, Strategic Transparency and Informed Trading: Will Capital Market Integration Force Convergence of Corporate Governance?, The Journal of Financial and Quantitative Analysis, Vol. 38, No. 1 (Mar., 2003), pp. 61-85

The paper develops a simple model of corporate ownership structure in which costs and benefits of ownership concentration are analyzed. The model compares the liquidity benefits obtained through dispersed corporate ownership with the benefits from efficient management control achieved by some degree of ownership concentration. The paper reexamines the free‐rider problem in corporate control in the presence of liquidity trading, derives predictions for the trade and pricing of blocks, and provides criteria for the optimal choice of ownership structure.