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Asymmetric Information and Bank Runs

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Abstract

In the existing literature, panic-based bank runs are triggered by a commonly acknowledged and observed sunspot signal. There are only two equilibrium realizations resulting from the commonly observed sunspot signal: Everyone runs or no one runs. I consider a more general and more realistic situation in which consumers observe noisy private sunspot signals. If the noise in the signals is sufficiently small, there exists a proper correlated equilibrium for some demand deposit contracts. A full bank run, a partial bank run (in which some consumers panic whereas others do not), or no bank run occurs, depending on the realization of the sunspot signals. If the probabilities of runs are small, the optimal demand deposit contract tolerates full and partial bank runs.

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Paper provided by Department of Economics, University of Missouri in its series Working Papers with number 1005.

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Length: 41 pgs.
Date of creation: 11 Feb 2010
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Handle: RePEc:umc:wpaper:1005

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Keywords: sunspot equilibrium; correlated equilibrium; imperfect coordination; imperfect information.;

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Cited by:
  1. Todd Keister & Huberto M. Ennis, 2007. "Commitment and Equilibrium Bank Runs," 2007 Meeting Papers 509, Society for Economic Dynamics.

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