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Do social networks prevent bank runs?

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Author Info

  • Alfonso Rosa García

    (Universidad de Murcia)

  • Hubert Janos Kiss

    (Universidad Autónoma de Madrid)

  • Ismael Rodríguez Lara

    (Universidad de Alicante)

Abstract

We develop, both theoretically and experimentally, a stereotypical environment that allows for coordination breakdown, leading to a bank run. Three depositors are located at the nodes of a network and have to decide whether to keep their funds deposited or to withdraw. One of the depositors has immediate liquidity needs, whereas the other two depositors do not. Depositors act sequentially and observe others actions only if connected by the network. Theoretically, a link connecting the first two depositors to decide is sufficient to avoid a bank run. However, our experimental evidence shows that subjects¿ choice is not affected by the existence of the link per se. Instead, being observed and the particular action that is observed determine subjects¿ choice. Our results highlight the importance of initial decisions in the emergence of a bank run. In particular, Bayesian analysis reveals that subjects clearly depart from predicted behavior when observing a withdrawal.

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File URL: http://www.ivie.es/downloads/docs/wpasad/wpasad-2009-25.pdf
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Bibliographic Info

Paper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie AD with number 2009-25.

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Length: 26 pages
Date of creation: Oct 2009
Date of revision:
Publication status: Published by Ivie
Handle: RePEc:ivi:wpasad:2009-25

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

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References

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Citations

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Cited by:
  1. Alfonso Rosa García & Hubert Janos Kiss, 2012. "Coordination structures," Working Papers. Serie AD 2012-12, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  2. Martin Brown & Stefan Trautmann & Razvan Vlahu, 2012. "Contagious Bank Runs: Experimental Evidence," DNB Working Papers 363, Netherlands Central Bank, Research Department.
  3. 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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