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Optimal Bank Runs without Self-Fulfilling Prophecies

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  • Haibin Zhu

    (Duke University)

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    Abstract

    This paper extends the standard Diamond-Dybvig model for a general equilibrium in which depositors make their withdrawal decisions sequentially and banks strategically choose their contracts. There is a unique Subgame Perfect Nash Equilibrium (SPNE) in the decentralized economy. Bank runs can occur when depositors perceive a low return on bank assets. When information is imperfect, bank runs can happen even when the economy is in a good state. A representative bank can earn positive profits in equilibrium due to the sequential service constraint. When there are several risky projects available, the high-risk technology may be chosen as a socially efficient solution.

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    Bibliographic Info

    Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1753.

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    Date of creation: 01 Aug 2000
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    Handle: RePEc:ecm:wc2000:1753

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    1. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
    2. Ilan Goldfajn & Rodrigo O. Valdés, 1997. "Capital Flows and the Twin Crises," IMF Working Papers 97/87, International Monetary Fund.
    3. Walter B. Wriston, 1998. "Dumb Networks and Smart Capital," Cato Journal, Cato Journal, Cato Institute, vol. 17(3), Winter.
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    14. Russell Cooper & Thomas W. Ross, 1991. "Bank Runs: Liquidity and Incentives," NBER Working Papers 3921, National Bureau of Economic Research, Inc.
    15. Corsetti, G. & Pesenti, P. & Roubini, N., 1998. "What Caused the Asian Currency and Financial Crisis?," Papers 343, Banca Italia - Servizio di Studi.
    16. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August.
    17. David Backus & Silverio Foresi & Liuren Wu, 2002. "Contagion in Financial Markets," Finance 0207009, EconWPA.
    18. Gul, Faruk & Lundholm, Russell, 1995. "Endogenous Timing and the Clustering of Agents' Decisions," Journal of Political Economy, University of Chicago Press, vol. 103(5), pages 1039-66, October.
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