Asymmetric Information and Optimal Bank Reserves.

The article investigates the laissez-faire banking in an optimal market outcome model with decentralized bank reserves. Whether or not free banking will yield a socially optimal outcome in a model with decentralized trade and incomplete information is examined. A model was developed which focuses on one aspect of banking behavior, that of determining an optimal reserve policy, and on one factor suggesting that this policy should be regulated. The model demonstrates that incomplete or asymmetric information alone may not be sufficient to justify restrictions on bank behavior.