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Do Social Networks Prevent Bank Runs?

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  • Hubert Janos Kiss

    ()
    (Eötvös Loránd University, Department of Economics)

  • Ismael Rodriguez-Lara

    ()
    (ERI-CES)

  • Alfonso Rosa-Garcia

    ()
    (Universidad de Murcia, Dpt. Analisis Economico)

Abstract

We report experimental evidence on the effect of observability of actions on bank runs. We model depositors' decision-making in a sequential framework, with three depositors located at the nodes of a network. Depositors observe the other depositors' actions only if connected by the network. A sufficient condition to prevent bank runs is that the second depositor to act is able to observe the first one's action (no matter what is observed). Experimentally, we find that observability of actions affects the likelihood of bank runs, but depositors' choice is highly influenced by the particular action that is being observed. This finding suggests a new source for the ocurrence of bank runs. Observability of actions can provoke runs that cannot be explained neither by coordination nor by fundamental problems, the two main culprits identified by the literature.

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Bibliographic Info

Paper provided by University of Valencia, ERI-CES in its series Discussion Papers in Economic Behaviour with number 0812.

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Date of creation: Jun 2012
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Handle: RePEc:dbe:wpaper:0812

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Keywords: bank runs; social networks; coordination failures; experimental evidence;

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References

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Citations

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Cited by:
  1. Brown, Martin & Trautmann, Stefan T. & Vlahu, Razvan, 2012. "Contagious Bank Runs: Experimental Evidence," Working Papers on Finance 1207, University of St. Gallen, School of Finance.
  2. Alfonso Rosa García & Hubert Janos Kiss, 2012. "Coordination structures," Working Papers. Serie AD 2012-12, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  3. Hubert Janos Kiss & Ismael Rodriguez-Lara & Alfonso Rosa-Garcia, 2013. "Do Social Networks Prevent or Promote Bank Runs?," IEHAS Discussion Papers 1344, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  4. Kiss, Hubert Janos & Rodriguez-Lara, Ismael & Rosa-García, Alfonso, 2014. "Do Women Panic More Than Men? An Experimental Study on Financial Decision," MPRA Paper 52912, University Library of Munich, Germany.

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