On the Effects of Deposit Insurance and Observability on Bank Runs: An Experimental Study
AbstractWe 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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Bibliographic InfoPaper provided by University of Valencia, ERI-CES in its series Discussion Papers in Economic Behaviour with number 0211.
Date of creation: Feb 2011
Date of revision:
deposit insurance; observability; bank runs; experimental economics;
Other versions of this item:
- Hubert Janos Kiss & Ismael Rodriguez‐Lara & Alfonso Rosa‐García, 2012. "On the Effects of Deposit Insurance and Observability on Bank Runs: An Experimental Study," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(8), pages 1651-1665, December.
- Alfonso Rosa García & Hubert Janos Kiss & Ismael Rodríguez Lara, 2011. "On the effects of deposit insurance and observability on bank runs: an experimental study," Working Papers. Serie AD 2011-05, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-02-19 (All new papers)
- NEP-BAN-2011-02-19 (Banking)
- NEP-CIS-2011-02-19 (Confederation of Independent States)
- NEP-EXP-2011-02-19 (Experimental Economics)
- NEP-IAS-2011-02-19 (Insurance Economics)
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