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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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File URL: http://dx.doi.org/10.1006/redy.1998.0029
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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. Gul, Faruk & Pearce, David G., 1996. "Forward Induction and Public Randomization," Journal of Economic Theory, Elsevier, vol. 70(1), pages 43-64, July.
  2. Stephen Morris & Hyun Song Shin, 1995. "Informational events that trigger currency attacks," Working Papers 95-24, Federal Reserve Bank of Philadelphia.
  3. 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.
  4. 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.
  5. Kreps, David M & Wilson, Robert, 1982. "Sequential Equilibria," Econometrica, Econometric Society, vol. 50(4), pages 863-94, July.
  6. Edward J. Green & Ping Lin, 1996. "Implementing efficient allocations in a model of financial intermediation," Working Papers 576, Federal Reserve Bank of Minneapolis.
  7. Basu, K. & Weibull, J., 1990. "Strategy Subsets Closed Under Rational Behavior," Papers 62, Princeton, Woodrow Wilson School - Discussion Paper.
  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.
  9. Noldeke Georg & Samuelson Larry, 1993. "An Evolutionary Analysis of Backward and Forward Induction," Games and Economic Behavior, Elsevier, vol. 5(3), pages 425-454, July.
  10. AUMANN, Robert J., . "Subjectivity and correlation in randomized strategies," CORE Discussion Papers RP -167, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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