Does a Deposit Insurance Scheme Induce Moral Hazard among Bankers? Evidence from an experiment with bankers

Keywords: deposit insurance, credit market, deposit market, banking, moral hazard, laboratory experiment

Abstract

The implementation of a deposit insurance scheme entails a trade off. On one hand, as shown in theoretical and empirical studies, a deposit insurance scheme reduces the likelihood of a bank run. On the other hand, a deposit insurance scheme induces moral hazard among bankers that may lead to bank failures. We rigorously test the effect of different deposit coverage limit and the implementation of a differential premium treatment on bankers’ behaviors in the deposit and credit market. We do so by designing a laboratory experiment that involves real bankers as participants. We find that the coverage limit treatments do not have any effect on deposit rate offer. Nevertheless, we find that a high deposit coverage limit induces smaller banks to have a higher share of risky projects. This is evidence of moral hazard particularly among small banks.

Author Biographies

Gumilang Aryo Sahadewo, Universitas Gadjah Mada

SAHADEWO, Gumilang Aryo (SCOPUS AUTHOR ID: https://www.scopus.com/authid/detail.uri?authorId=42262723200), is a Lecturer at Department of Economics, Universitas Gadjah Mada. He earned his Doctor of Philosophy (Ph.D.) (2017) from The University of Pittsburgh, Pennsylvania; and his M. A. (2013) from University of Boston, Massachusetts. His research interests are experimental economics and economics of education. He has published articles at Gadjah Mada International Journal of Business and Journal of Human Resource (forthcoming).

Author’s contact details: Department of Economics, Faculty of Economics and Business Universitas Gadjah Mada, Jln. Sosio Humaniora No. 01 Bulaksumur.
Yogyakarta 55281; phone (mobile): +62 81227016556; e-mail: gasahadewo@ugm.ac.id

Bernardinus Maria Purwanto, Universitas Gadjah Mada

PURWANTO, Bernardinus Maria (SCOPUS AUTHOR ID: https://www.scopus.com/authid/detail.uri?authorId=55804952500&eid=2-s2.0-85060141436) is a Lecturer at Department of Management, Universitas Gadjah Mada; and he is also Resource Person, Directorate of Quality Assurance, Ministry of Research, Technology, and Higher Education, Republic of Indonesia. He earned his Philosophy of Doctor (Ph.D.) (2001) from University of the Philippines; his MBA (1991) in Marketing from Western Michigan University. His research interests mainly related to consumer behavior, social marketing, and corporate strategy. He has published articles at several international journal: Asia Pacific Journal of Advanced Business and Social Studies, Journal of Asia Business Studies, International Journal of Management and Marketing Research, Mediterranean Journal of Social Sciences, American International Journal of Contemporary Research, Gadjah Mada International Journal of Business, International Journal of Economics, and Business Administration, Asia Pacific Management Review, and International Journal of Market Research.Author’s contact details: Department of Management, Faculty of Economics and Business Universitas Gadjah Mada, Jln. Sosio Humaniora No.01 Bulaksumur.
Yogyakarta 55281; phone (mobile): +62 811254665; e-mail: bm-purwanto@ugm.ac.id

Rimawan Pradiptyo, Universitas Gadjah Mada

PRADIPTYO, Rimawan (SCOPUS AUTHOR ID: https://www.scopus.com/authid/detail.uri?authorId=18635103100&eid=2-s2.0-85060141436) is a Lecturer at Department of Economics, Universitas Gadjah Mada; and he is also Head, Economics Laboratory at the same faculty and university.  He earned his Ph.D. (Economics) and M.Sc. (Economics) from the University of York, UK. His research interests are Crime Economics, Game Theory, Experimental Economics, Economic Evaluation, and Industrial Economics. He has published articles at the several national journals and international journals.

Author’s contact details: Department of Economics, Faculty of Economics and Business Universitas Gadjah Mada, Jln. Sosio Humaniora No. 01 Bulaksumur.
Yogyakarta 55281; phone (mobile): +62 81227263555; e-mail: rimawan@ugm.ac.id.

References

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Published
2018-12-30
How to Cite
Sahadewo, G. A., Purwanto, B. M., & Pradiptyo, R. (2018). Does a Deposit Insurance Scheme Induce Moral Hazard among Bankers? Evidence from an experiment with bankers. Gadjah Mada International Journal of Business, 20(3), 355-373. Retrieved from https://journal.ugm.ac.id/v3/gamaijb/article/view/15642