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A Diamond-Dybvig Model Without Bank Run: the Power of Signaling

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  • Kiss, Hubert Janos

    ()
    (Departamento de Análisis Económico (Teoría e Historia Económica). Universidad Autónoma de Madrid.)

Abstract

This paper introduces the possibility of signaling into a finite-depositor version of the Diamond-Dybvig model. More precisely, the decision to keep the funds in the bank is assumed to be unobservable,but depositors are allowed to make it observable by signaling, at a cost. Depositors decide consecutively whether to withdraw their funds or continue holding balances in the bank, and they choose if they want to signal the latter decision. If the cost of signaling is moderate, then bank runs do not occur. Moreover,no signals are made, so the unconstrained-efficient allocation is implemented without any costs.

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Bibliographic Info

Paper provided by Universidad Autónoma de Madrid (Spain), Department of Economic Analysis (Economic Theory and Economic History) in its series Working Papers in Economic Theory with number 2010/06.

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Length: 16 pages
Date of creation: Nov 2010
Date of revision:
Handle: RePEc:uam:wpaper:201006

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Keywords: bank run; sequential game; signaling; iterated deletion of strictly dominated strategies; coordination.;

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