Equivalence between the Diamond-Dybvig banking model and the optimal income taxation model

It is shown that the Diamond-Dybvig [Journal of Political Economy 96 (1983) 768] banking model with a continuum of types of agents has the same analytical structure as the standard optimal income taxation model [Review of Economic Studies 38 (1971) 175; Review of Economic Studies 43 (1976) 261]. Insights from the income taxation literature immediately imply that a bank-run equilibrium exists in the banking model as long as the long-term project is sufficiently costly to liquidate. (C) 2002 Elsevier Science B.V. All rights reserved.