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Sequential Equilibrium and Competition in a Diamond-Dybvig Banking Model

  • Bernardino Adao

    (Departamento de Estudios Economicos, Banco de Portugal)

  • Ted Temzelides

    (Department of Economics, University of Iowa)

Within the framework of a Diamond-Dybvig model (1983), but with explicitly modelling the autarky choice during the planning period, we demonstrate that a mixed strategy bank run equilibrium that does not rely on sunspots may coexist with the sunspot run equilibrium previously studied in the literature. In a version of the model with multiple banks, there exist sequential equilibrium that imply positive results. However, the zero-profit contract in which runs never occur can be supported as the unique equilibrium outcome if the agents play pure strategies only and their beliefs are restricted to be consistent with a forward induction argument. (Copyright: Elsevier)

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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 1 (1998)
Issue (Month): 4 (October)
Pages: 859-877

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Handle: RePEc:red:issued:v:1:y:1998:i:4:p:859-877
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  1. Noeldecke,Georg & Samuelson,Larry, . "An evolutionary analysis of backward and forward induction," Discussion Paper Serie B 228, University of Bonn, Germany.
  2. R. Aumann, 2010. "Subjectivity and Correlation in Randomized Strategies," Levine's Working Paper Archive 389, David K. Levine.
  3. 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.
  4. David Kreps & Robert Wilson, 1998. "Sequential Equilibria," Levine's Working Paper Archive 237, David K. Levine.
  5. 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.
  6. Stephen Morris & Hyun Song Shin, 1995. "Informational events that trigger currency attacks," Working Papers 95-24, Federal Reserve Bank of Philadelphia.
  7. Gul, Faruk & Pearce, David G., 1996. "Forward Induction and Public Randomization," Journal of Economic Theory, Elsevier, vol. 70(1), pages 43-64, July.
  8. repec:oup:qjecon:v:102:y:1987:i:2:p:179-221 is not listed on IDEAS
  9. Green, Edward J. & Lin, Ping, 2003. "Implementing efficient allocations in a model of financial intermediation," Journal of Economic Theory, Elsevier, vol. 109(1), pages 1-23, March.
  10. Basu, Kaushik & Weibull, Jorgen W., 1991. "Strategy subsets closed under rational behavior," Economics Letters, Elsevier, vol. 36(2), pages 141-146, June.
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