Uncertainty Averse Bank Runners
AbstractIn the framework of a Diamond-Dybvig-Peck-Shell banking model, in which a broad class of feasible contractual arrangements is allowed and which admits a run equilibrium, we stress the assumption that depositors are uncertain of their position in the queue when expecting a run. The formalization of the depositor's attitude towards this form of uncertainty is inspired by the multiple prior maxmin expected utility (MEU) theory axiomatized by Gilboa and Schmeidler (1989). We prove that there exists a positive measure set of subjective prior beliefs, obtained from the minimization over the set of admissible priors, for which the bank run equilibrium disappears. The implication is that `suspension schemes' are valuable since, in addition to the improvement in risk-sharing among agents (Wallace (1990)), they may undermine panic-driven bank runs.
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Bibliographic InfoPaper provided by University of Rome La Sapienza, Department of Public Economics in its series Working Papers with number 71.
Date of creation: May 2004
Date of revision:
Uncertainty; Multi-Prior Beliefs; Suspension Schemes; Panic-Driven Bank Runs.;
Other versions of this item:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
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- Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
- Edward J. Green & Ping Lin, 2000. "Diamond and Dybvig's classic theory of financial intermediation : what's missing?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 3-13.
- Douglas W. Diamond & Philip H. Dybvig, 2000.
"Bank runs, deposit insurance, and liquidity,"
Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
- Peck, James & Shell, Karl, 2001.
"Equilibrium Bank Runs,"
01-10r, Cornell University, Center for Analytic Economics.
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