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Run equilibria in the Green-Lin model of financial intermediation

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  • Ennis, Huberto M.
  • Keister, Todd

Abstract

We study the Green-Lin model of financial intermediation [E.J. Green, P. Lin, Implementing efficient allocations in a model of financial intermediation, J. Econ. Theory 109 (2003) 1-23] under a more general specification of the distribution of types across agents. We derive the efficient allocation in closed form. We show that, in some cases, the intermediary cannot uniquely implement the efficient allocation using a direct revelation mechanism. In these cases, the mechanism also admits an equilibrium in which some (but not all) agents "run" on the intermediary and withdraw their funds regardless of their true liquidity needs. In other words, self-fulfilling runs can arise in a generalized Green-Lin model and these runs are necessarily partial, with only some agents participating.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 144 (2009)
Issue (Month): 5 (September)
Pages: 1996-2020

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Handle: RePEc:eee:jetheo:v:144:y:2009:i:5:p:1996-2020

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Web page: http://www.elsevier.com/locate/inca/622869

Related research

Keywords: Bank runs Implementation Private information Multiple equilibria Correlated types;

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Cited by:
  1. Ioannis Lazopoulos, 2010. "Optimal Intermediation Under Aggregate Consumption Uncertainty," School of Economics Discussion Papers 0710, School of Economics, University of Surrey.
  2. Arifovic, Jasmina & Hua Jiang, Janet & Xu, Yiping, 2013. "Experimental evidence of bank runs as pure coordination failures," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2446-2465.
  3. Chao Gu, 2010. "Asymmetric Information and Bank Runs," Working Papers 1005, Department of Economics, University of Missouri.
  4. Todd Keister, 2010. "Bailouts and financial fragility," Staff Reports 473, Federal Reserve Bank of New York.
  5. Harald Uhlig, 2009. "A Model of a Systemic Bank Run," Working Papers 2009-006, Becker Friedman Institute for Research In Economics.
  6. J. D. P. Bertolai & R. de O. Cavalcanti, 2011. "High interest rates: the golden rule for bank stability in the Diamond-Dybvig model," Working Papers 14-2011, Universidade de São Paulo, Faculdade de Economia, Administração e Contabilidade de Ribeirão Preto.
  7. Hajime Tomura, 2010. "Liquidity Transformation and Bank Capital Requirements," Working Papers 10-22, Bank of Canada.
  8. Ricardo de O. Calacanti, 2010. "Inside-money theory after Diamond and Dybvig," Economic Quarterly, Federal Reserve Bank of Richmond, issue 1Q, pages 59-82.
  9. Cavalcanti, Ricardo & Bertolai, Jefferson Donizeti Pereira & Monteiro, Paulo Klinger, 2011. "A note on convergence of Peck-Shell and Green-Lin mechanisms in the Diamond-Dybvig model," Economics Working Papers (Ensaios Economicos da EPGE) 722, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  10. Garcia-Rosa, Alfonso & Kiss, Hubert Janos & Rodriguez-Lara, Ismael, 2010. "Do Social Networks Prevent Bank Runs?," UMUFAE Economics Working Papers 9723, DIGITUM. Universidad de Murcia.
  11. Markus Kinateder & Hubert Janos Kiss, 2012. "Sequential decisions in the Diamond-Dybvig banking model," Working Papers. Serie AD 2012-16, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  12. Cavalcanti, Ricardo & Monteiro, Paulo Klinger, 2011. "Enriching Information to Prevent Bank Runs," Economics Working Papers (Ensaios Economicos da EPGE) 721, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  13. Itay Goldstein & Assaf Razin, 2013. "Three Branches of Theories of Financial Crises," NBER Working Papers 18670, National Bureau of Economic Research, Inc.
  14. Huberto M. Ennis & Todd Keister, 2010. "On the fundamental reasons for bank fragility," Economic Quarterly, Federal Reserve Bank of Richmond, issue 1Q, pages 33-58.
  15. Todd Keister & Huberto Ennis, 2012. "Optimal banking contracts and financial fragility," 2012 Meeting Papers 179, Society for Economic Dynamics.
  16. Azrieli, Yaron & Peck, James, 2012. "A bank runs model with a continuum of types," Journal of Economic Theory, Elsevier, vol. 147(5), pages 2040-2055.

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