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Beliefs, competition, and bank runs

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  • Bernadino Adao
  • Theodosios Temzelides

Abstract

Within the framework of Diamond-Dybvig (1983), the optimal (run free) outcome is shown to be the unique forward induction equilibrium. In a version of the model that posits Bertrand competition among banks, there are sequential equilibria that imply positive profits. However, the zero-profit contract is supported as the unique equilibrium outcome if the agents' beliefs are restricted to the space of beliefs consistent with the forward induction refinement.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 95-26.

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Date of creation: 1995
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Handle: RePEc:fip:fedpwp:95-26

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Keywords: Bank competition ; Bank deposits;

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References

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  1. Aumann, Robert J., 1974. "Subjectivity and correlation in randomized strategies," Journal of Mathematical Economics, Elsevier, Elsevier, vol. 1(1), pages 67-96, March.
  2. Noeldecke,Georg & Samuelson,Larry, . "An evolutionary analysis of backward and forward induction," Discussion Paper Serie B, University of Bonn, Germany 228, University of Bonn, Germany.
  3. David Kreps & Robert Wilson, 1998. "Sequential Equilibria," Levine's Working Paper Archive 237, David K. Levine.
  4. Cho, In-Koo & Kreps, David M, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 102(2), pages 179-221, May.
  5. Basu, K. & Weibull, J., 1990. "Strategy Subsets Closed Under Rational Behavior," Papers, Princeton, Woodrow Wilson School - Discussion Paper 62, Princeton, Woodrow Wilson School - Discussion Paper.
  6. Edward J. Green, 1995. "Implementing Efficient Allocations in a Model of Financial Intermediation," Meeting papers, EconWPA 9506001, EconWPA.
  7. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  8. Stephen Morris & Hyun Song Shin, 1995. "Informational events that trigger currency attacks," Working Papers, Federal Reserve Bank of Philadelphia 95-24, Federal Reserve Bank of Philadelphia.
  9. Gul, Faruk & Pearce, David G., 1996. "Forward Induction and Public Randomization," Journal of Economic Theory, Elsevier, Elsevier, vol. 70(1), pages 43-64, July.
  10. Neil Wallace, 1988. "Another attempt to explain an illiquid banking system: the Diamond and Dybvig model with sequential service taken seriously," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Fall, pages 3-16.
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Cited by:
  1. Carmona, Guilherme, 2007. "Bank failures caused by Large withdrawals: An explanation based purely on liquidity," Journal of Mathematical Economics, Elsevier, Elsevier, vol. 43(7-8), pages 818-841, September.
  2. Todd Kaplan, 2006. "Why banks should keep secrets," Economic Theory, Springer, Springer, vol. 27(2), pages 341-357, January.
  3. Carmona, Guilherme, 2004. "On the Existence of Equilibrium Bank Runs in a Diamond-Dybvig Environment," FEUNL Working Paper Series, Universidade Nova de Lisboa, Faculdade de Economia wp448, Universidade Nova de Lisboa, Faculdade de Economia.
  4. Carlos Pimienta & Cristian Litan, 2008. "Conditions for equivalence between sequentiality and subgame perfection," Economic Theory, Springer, Springer, vol. 35(3), pages 539-553, June.
  5. Carmona, Guilherme & Leoni, Patrick, 2003. "Equilibrium Non-Panic Bank Failures," FEUNL Working Paper Series, Universidade Nova de Lisboa, Faculdade de Economia wp424, Universidade Nova de Lisboa, Faculdade de Economia.
  6. Ngalawa, Harold & Tchana Tchana, Fulbert & Viegi, Nicola, 2011. "Banking Instability and Deposit Insurance: The Role of Moral Hazard," MPRA Paper 31329, University Library of Munich, Germany.
  7. J. Carlos Gonzalez-Pimienta & Cristian M. Litan, 2005. "On The Equivalence Between Subgame Perfection And Sequentiality," Economics Working Papers, Universidad Carlos III, Departamento de Economía we052616, Universidad Carlos III, Departamento de Economía.

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