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Commitment and Equilibrium Bank Runs

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  • Todd Keister

    (Federal Reserve Bank of New York)

  • Huberto M. Ennis

    (Federal Reserve Bank of Richmond)

Abstract

We study the role of commitment in a version of the Diamond and Dybvig (JPE, 1983) model with no aggregate uncertainty. As is well known, the banking authority can eliminate the possibility of a bank run by committing to suspend payments to depositors if a run were to start. We show, however, that in an environment without commitment the banking authority will choose to only partially suspend payments during a run. In some cases, the reduction in early payouts under this partial suspension is insufficient to convince depositors to not participate in the run. Bank runs can then occur with positive probability in equilibrium. The fraction of depositors participating in such a run is stochastic and can be arbitrarily close to one.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2007 Meeting Papers with number 509.

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Date of creation: 2007
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Handle: RePEc:red:sed007:509

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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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  7. Todd Keister & Huberto M. Ennis, 2004. "Bank Runs and Investment Decisions Revisited," 2004 Meeting Papers 180, Society for Economic Dynamics.
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Cited by:
  1. Todd Keister & Huberto M. Ennis, 2008. "Run Equilibria in a Model of Financial Intermediation," 2008 Meeting Papers 513, Society for Economic Dynamics.
  2. Randall Wright & Cyril Monnet & Fabrizio Mattesini, 2009. "Banking: a mechanism design approach," 2009 Meeting Papers 635, Society for Economic Dynamics.
  3. Huberto M. Ennis & Todd Keister, 2009. "Bank Runs and Institutions: The Perils of Intervention," American Economic Review, American Economic Association, vol. 99(4), pages 1588-1607, September.
  4. Marie Hoerova, 2007. "Run-prone banking and asset markets," Working Paper Series 845, European Central Bank.

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