A note on convergence of Peck-Shell and Green-Lin mechanisms in the Diamond-Dybvig model

Abstract

We study the e¤ects of population size in the Peck-Shell analysis ofbank runs. We nd that a contract featuring equal-treatment for al-most all depositors of the same type approximates the optimum. Becausethe approximation also satis es Green-Lin incentive constraints, when theplanner discloses positions in the queue, welfare in these alternative spec-i cations are sandwiched. Disclosure, however, is not needed since ourapproximating contract is not subject to runs.keywords: bank fragility, role of population size, role of aggregate uncer-tainty