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A bank runs model with a continuum of types

Author Info

  • Azrieli, Yaron
  • Peck, James

Abstract

We consider a bank runs model à la Diamond and Dybvig (1983) [3] with a continuum of agent types, indexed by the degree of patience. Much of our understanding based on the two-type model must be modified. The endogenous determination of a cutoff type is central to the analysis. In the case where the bank can credibly commit to a contract, the optimal contract results in socially excessive early withdrawals in every equilibrium of the post-deposit subgame. Thus, even at the best equilibrium the socially efficient outcome is not achieved, and agentsʼ behavior exhibits features of a bank run. In the case where commitment is not possible, there are strictly more early withdrawals and strictly lower welfare than the full-commitment equilibrium.

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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 147 (2012)
Issue (Month): 5 ()
Pages: 2040-2055

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Handle: RePEc:eee:jetheo:v:147:y:2012:i:5:p:2040-2055
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

Keywords: Bank runs; Continuum of types; Optimal bank contract; Commitment;

Find related papers by JEL classification:

  • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative 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

References listed on IDEAS
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  1. Edward J. Green & Ping Lin, 1996. "Implementing efficient allocations in a model of financial intermediation," Working Papers 576, Federal Reserve Bank of Minneapolis.
  2. Ping Lin, 1996. "Banking, incentive constraints, and demand deposit contracts with nonlinear returns (*)," Economic Theory, Springer, vol. 8(1), pages 27-39.
  3. Morris, Stephen & Shin, Hyun Song, 1997. "Unique Equilibrium in a Model of Self-fulfilling Currency Attacks," CEPR Discussion Papers 1687, C.E.P.R. Discussion Papers.
  4. James Peck & Karl Shell, 2003. "Equilibrium Bank Runs," Journal of Political Economy, University of Chicago Press, vol. 111(1), pages 103-123, February.
  5. Gu, Chao, 2011. "Herding and bank runs," Journal of Economic Theory, Elsevier, vol. 146(1), pages 163-188, January.
  6. 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, 06.
  7. Peck, James & Shell, Karl, 2010. "Could making banks hold only liquid assets induce bank runs?," Journal of Monetary Economics, Elsevier, vol. 57(4), pages 420-427, May.
  8. Ennis, Huberto M. & Keister, Todd, 2009. "Run equilibria in the Green-Lin model of financial intermediation," Journal of Economic Theory, Elsevier, vol. 144(5), pages 1996-2020, September.
  9. repec:cup:cbooks:9780521585293 is not listed on IDEAS
  10. Andolfatto, David & Nosal, Ed & Wallace, Neil, 2007. "The role of independence in the Green-Lin Diamond-Dybvig model," Journal of Economic Theory, Elsevier, vol. 137(1), pages 709-715, November.
  11. repec:ner:tilbur:urn:nbn:nl:ui:12-154416 is not listed on IDEAS
  12. Carlsson, H. & van Damme, E.E.C., 1990. "Global games and equilibrium selection," Discussion Paper 1990-52, Tilburg University, Center for Economic Research.
  13. Ennis, Huberto M. & Keister, Todd, 2010. "Banking panics and policy responses," Journal of Monetary Economics, Elsevier, vol. 57(4), pages 404-419, May.
  14. Neil Wallace, 1990. "A banking model in which partial suspension is best," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 11-23.
  15. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
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Cited by:

  1. Todd Keister & Huberto Ennis, 2012. "Optimal banking contracts and financial fragility," 2012 Meeting Papers 179, Society for Economic Dynamics.

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