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Evolution, coordination, and banking panics

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  • Theodosios Temzelides

Abstract

I study equilibrium selection by an evolutionary process in an environment with multiple equilibria, one of which involves a banking panic. The analysis is built on a repeated version of the Diamod-Dybvig (1983) model. The optimal (run free) equilibrium is uniquely selected if it is also "risk dominant." Furthermore, the probability of observing a panic increases as the size of the banks decreases. I discuss local interaction and contagion effects that allow for a bankrun to spread first among banks in the same geographic location and then throughout the entire population.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 95-27.

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Date of creation: 1995
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Handle: RePEc:fip:fedpwp:95-27

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Related research

Keywords: Deposit insurance ; Bank failures;

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References

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  1. Edward J. Green, 1995. "Implementing Efficient Allocations in a Model of Financial Intermediation," Meeting papers 9506001, EconWPA.
  2. Villamil, A P, 1991. "Demand Deposit Contracts, Suspension of Convertibility, and Optimal Financial Intermediation," Economic Theory, Springer, vol. 1(3), pages 277-88, July.
  3. 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.
  4. P. Young, 1999. "The Evolution of Conventions," Levine's Working Paper Archive 485, David K. Levine.
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  7. James McAndrews & William Roberds, 1994. "Banks, payments, and coordination," Working Paper 94-14, Federal Reserve Bank of Atlanta.
  8. Lagunoff, Roger D & Matsui, Akihiko, 1995. "Evolution in Mechanisms for Public Projects," Economic Theory, Springer, vol. 6(2), pages 195-223, July.
  9. Charles W. Calomiris & Gary Gorton, 1991. "The Origins of Banking Panics: Models, Facts, and Bank Regulation," NBER Chapters, in: Financial Markets and Financial Crises, pages 109-174 National Bureau of Economic Research, Inc.
  10. John C. Harsanyi & Reinhard Selten, 1988. "A General Theory of Equilibrium Selection in Games," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262582384.
  11. Young, H Peyton, 1993. "The Evolution of Conventions," Econometrica, Econometric Society, vol. 61(1), pages 57-84, January.
  12. V.V. Chari, 1989. "Banking without deposit insurance or bank panics: lessons from a model of the U.S. national banking system," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 3-19.
  13. Bryant, John, 1980. "A model of reserves, bank runs, and deposit insurance," Journal of Banking & Finance, Elsevier, vol. 4(4), pages 335-344, December.
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  15. Champ, B. & Snith, B.D. & Williamson, D.S., 1991. "Currency Elasticity and Banking Panics: Theory and Evidence," RCER Working Papers 292, University of Rochester - Center for Economic Research (RCER).
  16. Ellison, Glenn, 1993. "Learning, Local Interaction, and Coordination," Econometrica, Econometric Society, vol. 61(5), pages 1047-71, September.
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  18. Kandori, M. & Mailath, G.J., 1991. "Learning, Mutation, And Long Run Equilibria In Games," Papers 71, Princeton, Woodrow Wilson School - John M. Olin Program.
  19. repec:att:wimass:9324 is not listed on IDEAS
  20. Chari, V V & Jagannathan, Ravi, 1988. " Banking Panics, Information, and Rational Expectations Equilibrium," Journal of Finance, American Finance Association, vol. 43(3), pages 749-61, July.
  21. Banerjee, Abhijit V, 1993. "The Economics of Rumours," Review of Economic Studies, Wiley Blackwell, vol. 60(2), pages 309-27, April.
  22. Jacklin, Charles J & Bhattacharya, Sudipto, 1988. "Distinguishing Panics and Information-Based Bank Runs: Welfare and Policy Implications," Journal of Political Economy, University of Chicago Press, vol. 96(3), pages 568-92, June.
  23. Binmore Kenneth G. & Samuelson Larry & Vaughan Richard, 1995. "Musical Chairs: Modeling Noisy Evolution," Games and Economic Behavior, Elsevier, vol. 11(1), pages 1-35, October.
  24. D. Foster & P. Young, 2010. "Stochastic Evolutionary Game Dynamics," Levine's Working Paper Archive 493, David K. Levine.
  25. Postlewaite, Andrew & Vives, Xavier, 1987. "Bank Runs as an Equilibrium Phenomenon," Journal of Political Economy, University of Chicago Press, vol. 95(3), pages 485-91, June.
  26. Banerjee, Abhijit V, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 797-817, August.
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Citations

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Cited by:
  1. Raphael H. Solomon, 2003. "Anatomy of a Twin Crisis," Working Papers 03-41, Bank of Canada.
  2. Arifovic, Jasmina & Hua Jiang, Janet & Xu, Yiping, 2013. "Experimental evidence of bank runs as pure coordination failures," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2446-2465.
  3. Bougheas, Spiros, 1999. "Contagious bank runs," International Review of Economics & Finance, Elsevier, vol. 8(2), pages 131-146, June.
  4. Ennis, Huberto M. & Keister, Todd, 2010. "Banking panics and policy responses," Journal of Monetary Economics, Elsevier, vol. 57(4), pages 404-419, May.
  5. Alexandra Lai, 2002. "Modelling Financial Instability: A Survey of the Literature," Working Papers 02-12, Bank of Canada.
  6. Hoag, Christopher, 2005. "Deposit drains on "interest-paying" banks before financial crises," Explorations in Economic History, Elsevier, vol. 42(4), pages 567-585, October.
  7. Huberto M. Ennis, 2003. "Economic fundamentals and bank runs," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 55-71.
  8. Upper, Christian, 2011. "Simulation methods to assess the danger of contagion in interbank markets," Journal of Financial Stability, Elsevier, vol. 7(3), pages 111-125, August.
  9. Niinimaki, Juha-Pekka, 2002. "Do time deposits prevent bank runs?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 12(1), pages 19-31, February.
  10. Jasmina Arifovic & Janet Hua Jiang, 2014. "Do Sunspots Matter? Evidence from an Experimental Study of Bank Runs," Working Papers 14-12, Bank of Canada.
  11. Sébastien Vivier-Lirimont, 2004. "Interbanking networks : towards a small financial world ?," Cahiers de la Maison des Sciences Economiques v04046, Université Panthéon-Sorbonne (Paris 1).
  12. Philippe Madiès, 2001. "Coassurance des dépôts et panique bancaire : une étude expérimentale," Post-Print halshs-00151511, HAL.
  13. Luo, Xueming, 2003. "Evaluating the profitability and marketability efficiency of large banks: An application of data envelopment analysis," Journal of Business Research, Elsevier, vol. 56(8), pages 627-635, August.
  14. de Bandt, Olivier & Hartmann, Philipp, 2000. "Systemic Risk: A Survey," CEPR Discussion Papers 2634, C.E.P.R. Discussion Papers.
  15. Chongmin Kim & Kam-Chau Wong, 2011. "Evolution of Walrasian equilibrium in an exchange economy," Journal of Evolutionary Economics, Springer, vol. 21(4), pages 619-647, October.

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