• Home
  • Issues
  • 2022
  • No 1
  • Public choice with regard to merit goods: A case study of private bank deposits

Public choice with regard to merit goods: A case study of private bank deposits

TERRA ECONOMICUS, , Vol. 20 (no. 1),

This paper aims to extend Richard A. Musgrave’s concept of merit goods by introducing the notion of a quasi-merit good. By that, the author means a private commodity that acquires merit unjustifiably via a manipulated political process preceding public choice. It is argued that within the original concept of merit goods, specifics are left to public choice in each society. Public choice can, however, be affected by special interests or a misconception, opening the way to public financing for goods of questionable public merit. To illustrate the author’s theoretical claim, the paper brings up the case of private bank deposits. It is argued that bank stakeholders are the main beneficiaries of the uninterrupted supply of household savings. Exploiting the public desire for financial stability, bankers press for government intervention, mostly on paternalistic grounds, which are only partly justified. A government-backed deposit guarantee scheme nudges bank depositors to act in a manner beneficial for bank stakeholders, i.e., to keep supplying savings to banks. Private interests are pursued in the first place, which creates grounds for the claim that private bank deposits are a quasi-merit good rather than a genuine one. The proposed concept of quasimerit goods complements the theories of public finance and public choice and potentially applies to other goods and services.
Citation: Vernikov A. (2022). Public choice with regard to merit goods: A case study of private bank deposits. Terra Economicus 20(1): 38–51. DOI: 10.18522/2073-6606-2022-20-1-38-51
Acknowledgment: My thanks go to the conference participants at the HSE-University (Moscow), Southern Federal University (Rostov-on-Don), WINIR Conference on Institutions for Inclusive Societies (Lund, 2019), Society for Advancement of Socio-Economics (2019), Institute of Economics RAS (Moscow), Alexander Rubinstein, Timothy Spence, two anonymous reviewers, and the editor of Terra.

Keywords: theory of public finance; merit goods; Musgrave; interest groups; public choice; welfare state

JEL codes: B52, D18, D70, E44, G21, G28, H42

  • Allen F., Carletti E., Goldstein I., Leonello A. (2015). Moral hazard and government guarantees in the banking industry. Journal of Financial Regulation 1(1): 30–50.
  • Arcelus F., Levine A. (1986). Merit goods and public choice: The case of higher education. Public Finance = Finances publiques 41(3): 303–315.
  • Atkinson A. (1987). The collected papers of Richard A. Musgrave. A review article. Journal of Public Economics 33: 389–398.
  • Atmaca S., Kirschenmann K., Ongena S., Schoors K. (2020). Deposit insurance, bank ownership and depositor behavior. ZEW Discussion Paper No. 20-077.
  • Barone E. (1959). On public needs, pp. 165–167. In: R.A. Musgrave (ed.) The Theory of Public Finance. N.Y.-L.: McGraw-Hill.
  • Barth J., Caprio G., Levine R. (2013). Bank regulation and supervision in 180 countries from 1999 to 2011. Journal of Financial Economic Policy 5(2): 111–219.
  • Baumol W. (1993). Social wants and dismal science: The curious case of the climbing costs of health and teaching. Proceedings of the American Philosophical Society 137(4): 612–637.
  • Beckerman W. (1986). How large a public sector? Oxford Review of Economic Policy 2(2): 7–24.
  • Brennan G., Lomasky L. (1983). Institutional aspects of “merit goods” analysis. FinanzArchiv / Public Finance Analysis 41(2): 183–206.
  • Brennan G., Buchanan J. (1985). The Reason of Rules. N.Y.: Cambridge Univ. Press.
  • Bryant J. (1980). A model of reserves, bank runs, and deposit insurance. Journal of Banking and Finance 4(4): 335–344.
  • Buchanan J. (1960). The theory of public finance. Southern Economic Journal 26(3): 234–238.
  • Calomiris Ch. (1999). Building an incentive-compatible safety net. Journal of Banking and Finance 23(10): 1499–1519.
  • Calomiris Ch., Jaremski M. (2018). Stealing deposits: Deposit insurance, risk-taking, and the removal of market discipline in early 20th century banks. Journal of Finance 74(2): 711–754.
  • Chernykh L., Cole R. (2011). Does deposit insurance improve financial intermediation: Evidence from the Russian experiment. Journal of Banking and Finance 35(2): 388–402.
  • De Graeve F., Karas A. (2014). Evaluating theories of bank runs with heterogeneity restrictions. Journal of the European Economic Association 12(4): 969–996.
  • Demirguc-Kunt A., Huizinga H. (2004). Market discipline and deposit insurance. Journal of Monetary Economics 51: 375–399.
  • Demirguc-Kunt A., Kane E., Laeven L. (2008). Determinants of deposit insurance adoption and design. Journal of Financial Intermediation 17(3): 407–438.
  • Demirguc-Kunt A., Kane E., Laeven L. (2015). Deposit insurance around the world: A comprehensive analysis and database. Journal of Financial Stability 20: 155–183.
  • Diamond D., Dybvig Ph. (1983). Bank runs, deposit insurance, and liquidity. Journal of Political Economy 91(3): 401–419.
  • Dworkin G. (2019). “Paternalism”. In: E. Zalta (ed.) The Stanford Encyclopedia of Philosophy.
  • Elster J. (1985). Weakness of will and the free rider problem. Economics and Philosophy 1(2): 231–265.
  • Greif A., Mokyr J. (2016). Institutions and economic history: a critique of professor McCloskey. Journal of Institutional Economics 12(1): 29–41.
  • Grinberg R., Rubinstein A. (2005). Economic Sociodynamics. N.Y.: Springer.
  • Head J. (1966). On merit goods. FinanzArchiv / Public Finance Analysis 25(1): 1–29.
  • Hogan T., Luther W. (2014). The explicit costs of government deposit insurance. Cato Journal 34(1): 145–170.
  • Hogan T., Johnson K. (2016). Alternatives to the Federal Deposit Insurance Corporation. Independent Review 20(3): 433–454.
  • Hogan T., Luther W. (2016). The implicit costs of government deposit insurance. Journal of Private Enterprise 31(2): 1–13.
  • Karas A., Pyle W., Schoors K. (2010). How do Russian depositors discipline their banks? Evidence of a backward bending deposit supply function. Oxford Economic Papers 62(1): 36–61.
  • Karas A., Pyle W., Schoors K. (2013). Deposit insurance, banking crises, and market discipline: Evidence from a natural experiment on deposit flows and rates. Journal of Money, Credit and Banking 45(1): 179–200.
  • Keely M. (1990). Deposit insurance, risk and market power in banking. American Economic Review 80(5): 1183–1200.
  • Maechler A., McDill K. (2006). Dynamic depositor discipline in US banks. Journal of Banking and Finance 30: 1871–1898.
  • Martinez-Peria M., Schmukler S. (2001). Do depositors punish banks for bad behavior? Market discipline, deposit insurance, and banking crises. Journal of Finance 56(3): 1029–1051.
  • Musgrave R. (1957). A multiple theory of budget determination. FinanzArchiv / Public Finance Analysis 17(3): 333–343.
  • Musgrave R. (1959). The Theory of Public Finance. N.Y.-L.: McGraw-Hill.
  • Musgrave R. (1987). Merit goods, pp. 452–453. In: The New Palgrave: A Dictionary of Economics, vol. 3.
  • Musgrave R. (1996). The role of the state in fiscal theory. International Tax and Public Finance 3: 247–258.
  • Olson M. (1965). The Logic of Collective Action: Public Goods and the Theory of Groups. Cambridge: Harvard University Press.
  • Prest A. (1959). The theory of public finance by R. A. Musgrave (Review). Economic Journal 69(276): 766–770.
  • Pyle W., Schoors K., Semenova M., Yudaeva K. (2012). Depositor behavior in Russia in the aftermath of financial crisis. Eurasian Geography and Economics 53(2): 267–285.
  • Rodrik D. (2000). Institutions for high quality growth: What they are and how to acquire them. Studies in Comparative International Development 35(3): 3–31.
  • Stigler J. (1970). Director’s law of public income redistribution. Journal of Law and Economics 13(1): 1–10.
  • Stiglitz J. (1989). Markets, market failures, and development. American Economic Review 79(2): 197–203.
  • Stiglitz J. (2009). The current economic crisis and lessons for economic theory. Eastern Economic Journal 35: 281–296.
  • Tanzi V. (2011). Government versus Markets: The Changing Economic Role of the State. Cambridge University Press.
  • Thaler R. (1980). Toward a positive theory of consumer choice. Journal of Economic Behavior and Organization 1(1): 39–60.
  • Thaler R., Sunstein C. (2003). Libertarian paternalism. American Economic Review 93(2): 175–179.
  • Thies C., Gerlowski D. (1989). Deposit insurance: A history of failure. Cato Journal 8(3): 677–693.
  • Tietzel M., Muller Ch. (2002). Merit goods from a constitutional perspective, pp. 375–400. In: G.Brennan, H. Kliemt, R. Tollison (eds.) Method and Morals in Constitutional Economics. SpringerVerlag Berlin Heidelberg.
  • Ungan E., Caner S., Ozy?ld?r?m S. (2008). Depositors assessment of bank riskiness in the Russian Federation. Journal of Financial Services Research 33(2): 77–100.
  • Ver Eecke W. (ed.) (2007). An Anthology Regarding Merit Goods: The Unfinished Ethical Revolution in Economic Theory. Purdue Univ. Press: West Lafayette, IN.
  • Vernikov A. (2019). The drivers of institutional change in a post-socialist economy: The case of deposit insurance introduction in Russia. Journal of Institutional Studies 11(1): 129–143. DOI: 10.17835/2076-6297.2019.11.1.129-143
  • Vernikov A. (2020). Deposit protection in a paternalistic state: The Russian case. Terra Econ. 18(1): 28–42. DOI: 10.18522/2073-6606-2020-18-1-28-42
  • White E. (1982). The political economy of banking regulation, 1864–1933. Journal of Economic History 42(1): 33–40.
  • White E. (1997). Deposit insurance, pp. 85–100. In: G. Caprio, D. Vittas (eds.) Reforming Financial Systems: Historical Implications for Policy. Cambridge, UK: Cambridge Univ. Press.
  • White M. (2019). Nudging merit goods: Conceptual, normative, and practical connections. Forum for Social Economics 48(3): 248–263.
Publisher: Southern Federal University
Founder: Southern Federal University
ISSN: 2073-6606