Suspension in a Global-Games version of the Diamond-Dybvig model
AbstractThis work builds on the model in Goldstein and Pauzner (GP) (2005), a global-games version of the Diamond-Dybvig (DD) (1983) model in which there is uncertainty about the long-term return and in which agents observe noisy signals about that return. GP limited their investigation to a banking contract that makes a noncontingent promised payoff to those who withdraw early until the bank's resources are exhausted. We amend the contract and permit suspension. As we show, there is a class of suspension policies that gives rise to uniqueness without requiring the new assumption introduced in a proof in GP; namely, the short-term return is also random. In general, both the GP policy and my generalization of it to allow suspension seem not to be the best banking contracts. However, if the return uncertainty is sufficiently small, then there are policies in the class we study that imply ex ante welfare close to the first-best outcome in DD, which itself is an upper bound on welfare in the model with return uncertainty.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 46622.
Date of creation: 29 Apr 2013
Date of revision:
Bank run: Global Game;
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-05-05 (All new papers)
- NEP-BAN-2013-05-05 (Banking)
- NEP-CTA-2013-05-05 (Contract Theory & Applications)
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