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An Experiment on the Causes of Bank Run Contagions

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Author Info

  • Surajeet Chakravarty

    (Department of Economics, University of Exeter)

  • Miguel A. Fonseca

    (Department of Economics, University of Exeter)

  • Todd Kaplan

    (Department of Economics, University of Exeter)

Abstract

To understand the mechanisms behind bank run contagions, we conduct bank run experiments in a modified Diamond-Dybvig setup with two banks (Left and Right). The banks' liquidity levels are either linked or independent. Left Bank depositors see their bank's liquidity level before deciding. Right Bank depositors only see Left Bank withdrawals before deciding. We find that Left Bank depositors' actions signicantly affect Right Bank depositors' behavior, even when liquidities are independent. Furthermore, a panic may be a one-way street: an increase in Left Bank withdrawals can cause a panic run on the Right Bank, but a decrease cannot calm markets.

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File URL: http://people.exeter.ac.uk/cc371/RePEc/dpapers/DP1206.pdf
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Bibliographic Info

Paper provided by Exeter University, Department of Economics in its series Discussion Papers with number 1206.

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Date of creation: 2012
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Handle: RePEc:exe:wpaper:1206

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Keywords: bank runs; contagion; experiment; multiple equilibria.;

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References

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  1. Dieter Balkenborg & Todd Kaplan & Timothy Miller, 2011. "Teaching Bank Runs with Classroom Experiments," The Journal of Economic Education, Taylor & Francis Journals, vol. 42(3), pages 224-242, July.
  2. Kaplan, T.R., 2000. "Why Banks Should Keep Secrets," Discussion Papers 0014, Exeter University, Department of Economics.
  3. Giovanna Devetag & Andreas Ortmann, 2006. "When and Why? A Critical Survey on Coordination Failure in the Laboratory," CEEL Working Papers 0605, Cognitive and Experimental Economics Laboratory, Department of Economics, University of Trento, Italia.
  4. Greiner, Ben, 2004. "An Online Recruitment System for Economic Experiments," MPRA Paper 13513, University Library of Munich, Germany.
  5. Milton Friedman & Anna J. Schwartz, 1963. "A Monetary History of the United States, 1867-1960," NBER Books, National Bureau of Economic Research, Inc, number frie63-1, octubre-d.
  6. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
  7. Garratt, Rod & Keister, Todd, 2009. "Bank runs as coordination failures: An experimental study," Journal of Economic Behavior & Organization, Elsevier, vol. 71(2), pages 300-317, August.
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Cited by:
  1. Jasmina Arifovic & Janet Hua Jiang, 2014. "Do Sunspots Matter? Evidence from an Experimental Study of Bank Runs," Working Papers 14-12, Bank of Canada.

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