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Sequential Equilibrium and Competition in a Diamond-Dybvig Banking Model

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  • Bernardino Adao

    (Departamento de Estudios Economicos, Banco de Portugal)

  • Ted Temzelides

    (Department of Economics, University of Iowa)

Abstract

Within the framework of a Diamond-Dybvig model (1983), but with explicitly modelling the autarky choice during the planning period, we demonstrate that a mixed strategy bank run equilibrium that does not rely on sunspots may coexist with the sunspot run equilibrium previously studied in the literature. In a version of the model with multiple banks, there exist sequential equilibrium that imply positive results. However, the zero-profit contract in which runs never occur can be supported as the unique equilibrium outcome if the agents play pure strategies only and their beliefs are restricted to be consistent with a forward induction argument. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1006/redy.1998.0029
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 1 (1998)
Issue (Month): 4 (October)
Pages: 859-877

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Handle: RePEc:red:issued:v:1:y:1998:i:4:p:859-877

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  1. Aumann, Robert J., 1974. "Subjectivity and correlation in randomized strategies," Journal of Mathematical Economics, Elsevier, vol. 1(1), pages 67-96, March.
  2. Noldeke Georg & Samuelson Larry, 1993. "An Evolutionary Analysis of Backward and Forward Induction," Games and Economic Behavior, Elsevier, Elsevier, vol. 5(3), pages 425-454, July.
  3. Green, Edward J. & Lin, Ping, 2003. "Implementing efficient allocations in a model of financial intermediation," Journal of Economic Theory, Elsevier, Elsevier, vol. 109(1), pages 1-23, March.
  4. Basu, K. & Weibull, J., 1990. "Strategy Subsets Closed Under Rational Behavior," Papers, Princeton, Woodrow Wilson School - Discussion Paper 62, Princeton, Woodrow Wilson School - Discussion Paper.
  5. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(3), pages 401-19, June.
  6. Neil Wallace, 1988. "Another attempt to explain an illiquid banking system: the Diamond and Dybvig model with sequential service taken seriously," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Fall, pages 3-16.
  7. Cho, In-Koo & Kreps, David M, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 102(2), pages 179-221, May.
  8. David M Kreps & Robert Wilson, 2003. "Sequential Equilibria," Levine's Working Paper Archive 618897000000000813, David K. Levine.
  9. Gul, Faruk & Pearce, David G., 1996. "Forward Induction and Public Randomization," Journal of Economic Theory, Elsevier, Elsevier, vol. 70(1), pages 43-64, July.
  10. Stephen Morris & Hyun Song Shin, 1995. "Informational events that trigger currency attacks," Working Papers 95-24, Federal Reserve Bank of Philadelphia.
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Cited by:
  1. Carmona, Guilherme, 2004. "On the Existence of Equilibrium Bank Runs in a Diamond-Dybvig Environment," FEUNL Working Paper Series, Universidade Nova de Lisboa, Faculdade de Economia wp448, Universidade Nova de Lisboa, Faculdade de Economia.
  2. Carmona, Guilherme & Leoni, Patrick, 2003. "Equilibrium Non-Panic Bank Failures," FEUNL Working Paper Series, Universidade Nova de Lisboa, Faculdade de Economia wp424, Universidade Nova de Lisboa, Faculdade de Economia.
  3. Carmona, Guilherme, 2007. "Bank failures caused by Large withdrawals: An explanation based purely on liquidity," Journal of Mathematical Economics, Elsevier, vol. 43(7-8), pages 818-841, September.
  4. Carlos Pimienta & Cristian Litan, 2008. "Conditions for equivalence between sequentiality and subgame perfection," Economic Theory, Springer, Springer, vol. 35(3), pages 539-553, June.
  5. J. Carlos Gonzalez-Pimienta & Cristian M. Litan, 2005. "On The Equivalence Between Subgame Perfection And Sequentiality," Economics Working Papers we052616, Universidad Carlos III, Departamento de Economía.
  6. Kaplan, T.R., 2000. "Why Banks Should Keep Secrets," Discussion Papers, Exeter University, Department of Economics 0014, Exeter University, Department of Economics.
  7. Ngalawa, Harold & Tchana Tchana, Fulbert & Viegi, Nicola, 2011. "Banking Instability and Deposit Insurance: The Role of Moral Hazard," MPRA Paper 31329, University Library of Munich, Germany.

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