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Bank Runs: An Experimental Study

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Author Info
Rod Garratt (University of California, Santa Barbara)

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Abstract

We use experimental methods to investigate the extent to which breakdowns in coordination can lead to bank runs. Subjects decide whether to leave money deposited in a bank or withdraw it early; a run occurs when there are too many early withdrawals. We explore the effects of randomly forcing some subjects to withdraw early and varying the number of opportunities subjects have to withdraw. Bank runs occur frequently with forced withdrawals, even if these withdrawals are unlikely to cause the bank to fail. Exposure to bank runs has a much larger effect on future withdrawal behavior when there are multiple withdrawal opportunities than with a single opportunity. We also evaluate individual withdrawal decisions according to simple cutoff rules. We find that the cutoff rule corresponding to the payoff-dominant equilibrium of the game, which involves Bayesian updating of probabilities, explains subject behavior better than other rules.

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Paper provided by Department of Economics, UC Santa Barbara in its series University of California at Santa Barbara, Economics Working Paper Series with number wp3-05.

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Date of creation: 03 Aug 2005
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Handle: RePEc:cdl:ucsbec:wp3-05

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Related research
Keywords: bank run; coordination game; Bayesian updating; experimental;

References listed on IDEAS
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  1. Franklin Allen & Douglas Gale, 1998. "Optimal Financial Crises," Journal of Finance, American Finance Association, vol. 53(4), pages 1245-1284, 08. [Downloadable!] (restricted)
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  2. Cooper, Russell, et al, 1990. "Selection Criteria in Coordination Games: Some Experimental Results," American Economic Review, American Economic Association, vol. 80(1), pages 218-33, March. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. John Duffy, 2008. "Macroeconomics: A Survey of Laboratory Research," Working Papers 334, University of Pittsburgh, Department of Economics, revised Mar 2008. [Downloadable!]
  2. John Duffy & Dean Corbae, 2006. "Experiments with Network Formation," Working Papers 292, University of Pittsburgh, Department of Economics, revised Aug 2007. [Downloadable!]
    Other versions:
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