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On the Effects of Deposit Insurance and Observability on Bank Runs: An Experimental Study

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  • HUBERT JANOS KISS
  • ISMAEL RODRIGUEZ‐LARA
  • ALFONSO ROSA‐GARCÍA

Abstract

We study the effects of deposit insurance and observability of previous actions on the emergence of bank runs by means of a controlled laboratory experiment. We consider three depositors in the line of a common bank. Depositors decide in sequence between withdrawing or keeping their money deposited. We have three different treatments in which depositors who keep the money have full insurance, are partially insured, or not insured at all in case of a bank run. We find that different levels of deposit insurance and the possibility of observing other depositors' actions reduce the likelihood of bank runs. The effect of these variables is not independent. Our data suggest that optimal deposit insurance should take into account the degree of observability: full and partial insurance are equally effective when decisions are observable, whereas full insurance is more likely to prevent bank runs when depositors do not observe other depositors' decisions.

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File URL: http://hdl.handle.net/10.1111/j.1538-4616.2012.00548.x
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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 44 (2012)
Issue (Month): 8 (December)
Pages: 1651-1665

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Handle: RePEc:mcb:jmoncb:v:44:y:2012:i:8:p:1651-1665

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Kenneth Judd & Lilia Maliar & Serguei Maliar, 2011. "Solving the multi-country real business cycle model using ergodic set methods," Working Papers. Serie AD 2011-01, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
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Cited by:
  1. Jasmina Arifovic & Janet Hua Jiang, 2014. "Do Sunspots Matter? Evidence from an Experimental Study of Bank Runs," Working Papers 14-12, Bank of Canada.
  2. Martin Brown & Stefan Trautmann & Razvan Vlahu, 2012. "Contagious Bank Runs: Experimental Evidence," DNB Working Papers 363, Netherlands Central Bank, Research Department.
  3. Lambert, Claudia & Noth, Felix & Schüwer, Ulrich, 2013. "How do insured deposits affect bank risk? Evidence from the 2008 emergency economic stabilization act," SAFE Working Paper Series 38, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
  4. Hubert Janos Kiss & Ismael Rodriguez-Lara & Alfonso Rosa-Garcia, 2012. "Do Social Networks Prevent Bank Runs?," Discussion Papers in Economic Behaviour 0812, University of Valencia, ERI-CES.
  5. Claudia Lambert & Felix Noth & Ulrich Schüwer, 2013. "How Do Insured Deposits Affect Bank Risk?: Evidence from the 2008 Emergency Economic Stabilization Act," Discussion Papers of DIW Berlin 1347, DIW Berlin, German Institute for Economic Research.
  6. Markus Kinateder & Hubert Janos Kiss, 2013. "Sequential decisions in the Diamond-Dybvig banking model," IEHAS Discussion Papers 1345, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.

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