Proof of Proposition 6: We begin with the case of parameter values such that q, k < 1,
and show that there exists a value reD > 0 such that kreg <kCS if and only if rD < reD .
Consider the solution that maximizes consumer surplus, kCS, and assume that R<4c and
c > 16R⅛, which implies that q, kCS < 1. From the condition defining kCS,
(R — (1 — kCS )rD ¢2 , ʌ
∏ = ʌ---⅛--— kCS ГЕ = 0,
16c
one can clearly see that, as rD → 0, kCS → 16R2^ < 1 for c > ∣(R2.
By contrast, kreg is defined by
∂SW
∂k
rD RR +(1 — kreg )rDλ
= 4c к 2 )
+ rD — rE =0.
For rD → 0, kreg → 0 as well, since it is optimal to just have deposit-based finance. These
two results together imply that there is some threshold rD such that, for rD < r D, kreg < kCS.
At the other extreme, we consider the solutions as rD → rE. For c > ι∣r~, kCS =
8c-R+rE-4√ (4c-R+rE )c
ГЕ
< 1.
By comparison, kreg → 1 as rD → rE for all parameter values.
Therefore, we can also conclude that there must exist some threshold rD such that, for
rD > rD, kreg > kCS.
Comparing the two values of k, kreg <kCS if and only if
kreg =
RrD + rD2 — 8c (rE — rD)
8crE — RrD + rD — 4 у/rEc (4сге — RrD + rD )
= kCS
Rearranging, we obtain the condition for kreg — kCS < 0 as:
ɪ RRrD + 4crD — 8сге + 2qcrE (4сге — RrD + rD)) < 0
Since we know that for low values of rD this condition will be satisfied, but not for higher
values, we can establish that there is a unique threshold where the inequality flips (i.e., that
30
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