Staff Reports
Piggy Banks: Financial Intermediaries as a Commitment to Save
November 1998 Number 50
Revised April 2013
JEL classification: E21, G21, G23

Authors: Donald P. Morgan and Katherine A. Samolyk

Banks and other intermediaries may help savers commit to investment plans that savers could not stick to if they held assets directly. We illustrate this commitment function using a version of the Diamond and Dybvig (1983) model, where savers’ short-run liquidity needs are correlated with shocks to investment opportunities. The investment securities are all freely tradeable, yet savers still do better if they delegate their investment decisions to an intermediary that overrides the savers’ liquidity demands when investment opportunities warrant. Bank CDs, insurance annuities, pensions, and even social security, by locking funds out of reach, may all constitute real-world examples of this commitment role of financial intermediaries.

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