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On the Effects of Deposit Insurance and Observability on Bank Runs: An Experimental Study

  • Hubert Janoss Kiss

    ()

    (University Complutense of Madrid)

  • Ismael Rodriguez Lara

    ()

    (ERI-CES)

  • Alfonso Rosa Garcia

    ()

    (University of Murcia)

We study the effects of deposit insurance and observability of previous actions on the emergence of bank runs by means of a controlled laboratory experiment. We consider three depositors in the line of a common bank. Depositors decide in sequence between withdrawing or keeping their money deposited. We have three different treatments in which depositors who keep the money have full insurance, are partially insured, or not insured at all in case of a bank run. We find that different levels of deposit insurance and the possibility of observing other depositors' actions reduce the likelihood of bank runs. The effect of these variables is not independent. Our data suggest that optimal deposit insurance should take into account the degree of observability: full and partial insurance are equally effective when decisions are observable, whereas full insurance is more likely to prevent bank runs when depositors do not observe other depositors' decisions.

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File URL: http://www.uv.es/erices/RePEc/WP/2011/0211.pdf
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Paper provided by University of Valencia, ERI-CES in its series Discussion Papers in Economic Behaviour with number 0211.

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Date of creation: Feb 2011
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Handle: RePEc:dbe:wpaper:0211
Contact details of provider: Web page: http://www.erices.es/

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  1. Maliar, Serguei & Maliar, Lilia & Judd, Kenneth, 2011. "Solving the multi-country real business cycle model using ergodic set methods," Journal of Economic Dynamics and Control, Elsevier, vol. 35(2), pages 207-228, February.
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