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Herding and bank runs

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  • Gu, Chao

Abstract

Traditional models of bank runs do not allow for herding effects, because in these models withdrawal decisions are assumed to be made simultaneously. I extend the banking model to allow a depositor to choose his withdrawal time. When he withdraws depends on his consumption type (patient or impatient), his private, noisy signal about the quality of the bank's portfolio, and the withdrawal histories of the other depositors. Some of these runs are efficient in that the bank is liquidated before the portfolio worsens. Others are not efficient; these are cases in which the herd is misled.

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  • Gu, Chao, 2011. "Herding and bank runs," Journal of Economic Theory, Elsevier, vol. 146(1), pages 163-188, January.
  • Handle: RePEc:eee:jetheo:v:146:y:2011:i:1:p:163-188
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    Cited by:

    1. Huberto M. Ennis & Todd Keister, 2016. "Optimal banking contracts and financial fragility," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 61(2), pages 335-363, February.
    2. Alfonso Rosa García & Hubert Janos Kiss & Ismael Rodríguez Lara, 2009. "Do social networks prevent bank runs?," Working Papers. Serie AD 2009-25, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    3. Schmidt, Lawrence & Timmermann, Allan G & Wermers, Russ, 2014. "Runs on Money Market Funds," CEPR Discussion Papers 9906, C.E.P.R. Discussion Papers.
    4. Gu, Chao, 2007. "Asymmetric Information and Bank Runs," Working Papers 07-14, Cornell University, Center for Analytic Economics.
    5. Kiss, H.J. & Rodriguez-Lara, I. & Rosa-García, A., 2016. "Think twice before running! Bank runs and cognitive abilities," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 64(C), pages 12-19.
    6. Lawrence Schmidt & Allan Timmermann & Russ Wermers, 2016. "Runs on Money Market Mutual Funds," American Economic Review, American Economic Association, vol. 106(9), pages 2625-2657, September.
    7. Kinateder, Markus & Kiss, Hubert János, 2014. "Sequential decisions in the Diamond–Dybvig banking model," Journal of Financial Stability, Elsevier, vol. 15(C), pages 149-160.
    8. Markus Kinateder & Hubert Janos Kiss & Agnes Pinter, 2015. "Would depositors like to show others that they do not withdraw? Theory and Experiment," IEHAS Discussion Papers 1553, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
    9. Asaf Manela & Zhiguo He, 2012. "Information Acquisition in Rumor-Based Bank Runs," 2012 Meeting Papers 170, Society for Economic Dynamics.
    10. Mathieu Bédard, 2016. "In Which Context is the Option Clause Desirable?," Journal of Business Ethics, Springer, vol. 139(2), pages 287-297, December.
    11. Kiss, Hubert Janos & Rodriguez-Lara, Ismael & Rosa-García, Alfonso, 2014. "Do social networks prevent or promote bank runs?," Journal of Economic Behavior & Organization, Elsevier, vol. 101(C), pages 87-99.
    12. Azrieli, Yaron & Peck, James, 2012. "A bank runs model with a continuum of types," Journal of Economic Theory, Elsevier, vol. 147(5), pages 2040-2055.
    13. Pablo Kurlat, 2015. "Optimal Stopping in a Model of Speculative Attacks," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(2), pages 212-226, April.
    14. Carlos Garriga & Chao Gu, 2012. "Withdrawal history, private information, and bank runs," Review, Federal Reserve Bank of St. Louis, issue July, pages 305-320.
    15. Zhiguo He & Asaf Manela, 2012. "Information Acquisition in Rumor Based Bank Runs," NBER Working Papers 18513, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    Bank runs Herding Imperfect information Perfect Bayesian equilibrium Optimal bank contract Sequential-move game Fundamental-based bank runs;

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E59 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Other
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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