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Beliefs, Competition, and Bank Runs

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Author Info
Ted Temzelides (Federal Reserve Bank of Philadelphia)
Bernandino Adao (University of Minnesota)

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Abstract

Within the framework of Diamond-Dybvig (1983), the optimal (run free) outcome is shown to be the unique forward induction equilibrium. In a version of the model that posits Bertrand competition among banks, there are sequential equilibria that imply positive profits. However, the zero-profit contract is supported as the unique equilibrium outcome if the agents' beliefs are restricted to the space of beliefs consistent with the forward induction refinement.

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Paper provided by EconWPA in its series Finance with number 9511001.

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Length: 19 pages
Date of creation: 22 Nov 1995
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Handle: RePEc:wpa:wuwpfi:9511001

Note: 19 pages, TEX(SWP) file
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Find related papers by JEL classification:
C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
D8 - Microeconomics - - Information, Knowledge, and Uncertainty
G - Financial Economics

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.:

  1. Basu, Kaushik & Weibull, Jorgen W., 1991. "Strategy subsets closed under rational behavior," Economics Letters, Elsevier, vol. 36(2), pages 141-146, June. [Downloadable!] (restricted)
    Other versions:
  2. David M Kreps & Robert Wilson, 2003. "Sequential Equilibrium," Levine's Working Paper Archive 618897000000000813, David K. Levine. [Downloadable!]
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  3. Aumann, Robert J., 1974. "Subjectivity and correlation in randomized strategies," Journal of Mathematical Economics, Elsevier, vol. 1(1), pages 67-96, March. [Downloadable!] (restricted)
  4. Stephen Morris & Hyun Song Shin, 1995. "Informational events that trigger currency attacks," Working Papers 95-24, Federal Reserve Bank of Philadelphia.
  5. Edward J. Green & Ping Lin, 1996. "Implementing efficient allocations in a model of financial intermediation," Working Papers 576, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  6. Noeldecke,Georg & Samuelson,Larry, . "An evolutionary analysis of backward and forward induction," Discussion Paper Serie B 228, University of Bonn, Germany.
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  7. Cho, In-Koo & Kreps, David M, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 179-221, May. [Downloadable!] (restricted)
  8. Neil Wallace, 1988. "Another attempt to explain an illiquid banking system: the Diamond and Dybvig model with sequential service taken seriously," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 3-16. [Downloadable!]
  9. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23. [Downloadable!]
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  10. Gul, Faruk & Pearce, David G., 1996. "Forward Induction and Public Randomization," Journal of Economic Theory, Elsevier, vol. 70(1), pages 43-64, July. [Downloadable!] (restricted)
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Cited by:
(explanations, 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.)

  1. J. Carlos Gonzalez-Pimienta & Cristian M. Litan, 2005. "On The Equivalence Between Subgame Perfection And Sequentiality," Economics Working Papers we052616, Universidad Carlos III, Departamento de Economía. [Downloadable!]
  2. Carlos Pimienta & Cristian Litan, 2008. "Conditions for equivalence between sequentiality and subgame perfection," Economic Theory, Springer, vol. 35(3), pages 539-553, June. [Downloadable!] (restricted)
  3. repec:bep:mactop:v:3:y:2003:i:1:p:1052-1052 is not listed on IDEAS
  4. Guilherme Carmona, 2004. "On the Existence of Equilibrium Bank Runs in a Diamond-Dybvig Environment," Finance 0404009, EconWPA. [Downloadable!]
    Other versions:
  5. Todd R. Kaplan, . "Why Banks Should Keep Secrets," Working papers _005, University of Minnesota, Department of Economics. [Downloadable!]
    Other versions:
  6. Carmona, Guilherme & Leoni, Patrick, 2003. "Equilibrium Non-Panic Bank Failures," FEUNL Working Paper Series wp424, Universidade Nova de Lisboa, Faculdade de Economia. [Downloadable!]
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