Moral hazard, e ¢ ciency and bank crises S.Chatterji and S.Ghosal,

Under what conditions should bank runs be tolerated? We study a model with moral hazard in banking where using banking contracts with a zero crisis probability will fail to mobilize deposits and result in autarchy. Without any a priori restrictions on banking contracts, we show that there is positive crisis risk in banking scenarios where there is a trade-o ¤ between ex ante and interim e ¢ ciency: positive crisis risk is required achieve constrained ex ante e ¢ ciency although it is interim ine ¢ cient. We discuss the policy implications of our model