We examine the optimal risk-taking behaviour of a risk-averse individual under the assumption of a guaranteed floor for wealth (limited liability). We show that the existence of limited liability raises the optimal exposure to risk. Also, there is a positive lower bound to initial wealth...

We consider in this paper the interaction between precautionary savings and insurance demand. Under the standard intertemporal expected utility framework, the effect of an increase in the concavity of the utility function is ambiguous because of the inability of this framework to distinguish...

We study optimal pricing rules for a public large-value payment system (LVPS) that produces a public good (like prevention of systemic risk) but faces competition by a private LVPS for the private provision of large value payments. We show that the marginal cost of the public LVPS has to be...

The classical Bagehot’s conception of a Lender of Last Resort (LOLR) that lends to illiquid banks has been criticized on two grounds: on the one hand, the distinction between insolvency and illiquidity is not clear cut; on the other a fully collateralized repo market allows Central Banks to...