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Bailouts and bank runs: Theory and evidence from TARP

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  • Wang, Chunyang

Abstract

During the recent financial crisis, there were bank runs right after government bailout announcements. This paper develops a global game model of information based bank runs to analyze how the announcement of bailouts affects investors’ bank run incentives. The equilibrium probability of bank runs is uniquely determined. I conclude that before the announcement, the existence of such bailout policy reduces investors’ bank run incentives, but after the announcement, investors may run on the bank, since such an announcement reflects the government's information about the bad bank asset. The empirical evidence from TARP is consistent with my theory.

Suggested Citation

  • Wang, Chunyang, 2013. "Bailouts and bank runs: Theory and evidence from TARP," European Economic Review, Elsevier, vol. 64(C), pages 169-180.
  • Handle: RePEc:eee:eecrev:v:64:y:2013:i:c:p:169-180
    DOI: 10.1016/j.euroecorev.2013.08.005
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    References listed on IDEAS

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    1. Shleifer, Andrei & Vishny, Robert W, 1997. " The Limits of Arbitrage," Journal of Finance, American Finance Association, vol. 52(1), pages 35-55, March.
    2. Veronesi, Pietro & Zingales, Luigi, 2010. "Paulson's gift," Journal of Financial Economics, Elsevier, vol. 97(3), pages 339-368, September.
    3. Todd Keister, 2016. "Bailouts and Financial Fragility," Review of Economic Studies, Oxford University Press, vol. 83(2), pages 704-736.
    4. 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.
    5. Itay Goldstein & Ady Pauzner, 2005. "Demand-Deposit Contracts and the Probability of Bank Runs," Journal of Finance, American Finance Association, vol. 60(3), pages 1293-1327, June.
    6. Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
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    Cited by:

    1. repec:kap:jeczfn:v:122:y:2017:i:1:d:10.1007_s00712-017-0530-z is not listed on IDEAS
    2. Cañón, Carlos & Margaretic, Paula, 2014. "Correlated bank runs, interbank markets and reserve requirements," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 515-533.
    3. repec:eee:jmacro:v:52:y:2017:i:c:p:135-146 is not listed on IDEAS

    More about this item

    Keywords

    Bailout; Bank run;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G01 - Financial Economics - - General - - - Financial Crises
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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