It is known that sunspots can trigger panic-based bank runs and that the optimal banking contract can tolerate panic-based runs. The existing literature assumes that these sunspots are based on a publicly observed, extrinsic randomizing device. In this paper, I extend the analysis of panic-based runs to include an asymmetric-information, extrinsic randomizing device. Depositors observe dierent, but correlated, signals on the stability of the bank. I O?nd that if the signals that depositors obtain are highly correlated, there exists a correlated equilibrium for some demand deposit contracts. In this equilibrium, a full bank run, a partial bank run, or non-bank run occurs depending on the realization of the signals. Computed examples indicate that in some economies, a demand-deposit contract that tolerates bank runs and partial bank runs is optimal, whereas in some other economies a run-proof contract is optimal.
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Paper provided by Department of Economics, University of Missouri in its series Working Papers with number
0721.
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