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Bank Runs and Costly Information

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Author Info

  • Semenova, M.

    (Laboratory for Institutional Analysis of Economic Reforms, IIA, National Research University - Higher School of Economics, Moscow, Russia)

Abstract

In this paper, we model the deposit market with costly information on bank risks. The model adds to the volume of literature related to the Diamond-Dybvig mod-el and related models of information-based bank runs. The inclusion of costly infor-mation signals indicates that depositors must decide whether to pay for information regarding changes in the riskiness of banking activities; these costs may involve, for instance, time and other resources needed to find and read financial information. We show that an efficient bank run is the only equilibrium even in case of non-negative information costs. To ensure the uniqueness of the efficient bank run equilibrium it is enough to lower the costs for at least one group of the depositors or introduce the deposit insurance system with co-insurance.

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File URL: http://www.econorus.org/repec/journl/2011-10-31-52r.pdf
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Bibliographic Info

Article provided by New Economic Association in its journal Journal of the New Economic Association.

Volume (Year): (2011)
Issue (Month): 10 ()
Pages: 31-52

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Handle: RePEc:nea:journl:y:2011:i:10:p:31-52

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Related research

Keywords: bank run; market discipline; banking system transparency;

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References

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  1. Yehning Chen, 1999. "Banking Panics: The Role of the First-Come, First-Served Rule and Information Externalities," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 946-968, October.
  2. Chen, Yehning & Hasan, Iftekhar, 2006. "Why do bank runs look like panic? A new explanation," Research Discussion Papers 19/2006, Bank of Finland.
  3. Williamson, Stephen D, 1988. "Liquidity, Banking, and Bank Failures," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(1), pages 25-43, February.
  4. S. Rao Aiyagari, 1988. "Banking panics, information, and rational expectations equilibrium," Working Papers 320, Federal Reserve Bank of Minneapolis.
  5. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  6. Alonso, Irasema, 1996. "On avoiding bank runs," Journal of Monetary Economics, Elsevier, vol. 37(1), pages 73-87, February.
  7. Edward J. Green & Ping Lin, 2000. "Diamond and Dybvig's classic theory of financial intermediation : what's missing?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 3-13.
  8. Postlewaite, Andrew & Vives, Xavier, 1987. "Bank Runs as an Equilibrium Phenomenon," Journal of Political Economy, University of Chicago Press, vol. 95(3), pages 485-91, June.
  9. Williams, Joseph, 1988. " Banking Panics, Information, and Rational Expectations Equilibrium: Discussion," Journal of Finance, American Finance Association, vol. 43(3), pages 761-63, July.
  10. Chen, Yehning & Hasan, Iftekhar, 2006. "The transparency of the banking system and the efficiency of information-based bank runs," Journal of Financial Intermediation, Elsevier, vol. 15(3), pages 307-331, July.
  11. Jacklin, Charles J & Bhattacharya, Sudipto, 1988. "Distinguishing Panics and Information-Based Bank Runs: Welfare and Policy Implications," Journal of Political Economy, University of Chicago Press, vol. 96(3), pages 568-92, June.
  12. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
  13. Chari, V V & Jagannathan, Ravi, 1988. " Banking Panics, Information, and Rational Expectations Equilibrium," Journal of Finance, American Finance Association, vol. 43(3), pages 749-61, July.
  14. Dowd, Kevin, 1992. " Models of Banking Instability: A Partial Review of the Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 6(2), pages 107-32.
  15. Cooper, Russell & Ross, Thomas W., 1998. "Bank runs: Liquidity costs and investment distortions," Journal of Monetary Economics, Elsevier, vol. 41(1), pages 27-38, February.
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