In a version of the Diamond and Dybvig (1983) model with aggregate uncertainty, we show that there exists an equilibrium with the following properties: all consumers deposit at the bank, all patient consumers wait for the last period to withdraw, and the bank fails with strictly positive probability. Furthermore, we show that the probability of a bank failure remains bounded away from zero as the number of consumers increases. We interpret such an equilibrium as reflecting a bank run, defined as an episode in which a large number of people withdraw their deposits from a bank, forcing it to fail. Our results show that we can have equilibrium bank runs with consumers poorly informed about the true state of nature, a sequential service constraint, an infinite marginal utility of consumption at zero, and without consumers' panic and sunspots. We therefore think that aggregate risk in Diamond-Dybvig-like environments can be an important element to explain bank runs.
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Paper provided by EconWPA in its series Finance with number
0404009.
Find related papers by JEL classification: C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Franklin Allen & Douglas Gale, 1998.
"Optimal Financial Crises,"
Journal of Finance,
American Finance Association, vol. 53(4), pages 1245-1284, 08.
[Downloadable!] (restricted)
James Peck & Karl Shell, 2003.
"Equilibrium Bank Runs,"
Journal of Political Economy,
University of Chicago Press, vol. 111(1), pages 103-123, February.
[Downloadable!] (restricted)
Other versions:
Peck, James & Shell, Karl, 2001.
"Equilibrium Bank Runs,"
Working Papers
01-10r, Cornell University, Center for Analytic Economics.
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