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Do Social Networks Prevent Bank Runs?

  • Hubert Janos Kiss

    ()

    (Eötvös Loránd University, Department of Economics)

  • Ismael Rodriguez-Lara

    ()

    (ERI-CES)

  • Alfonso Rosa-Garcia

    ()

    (Universidad de Murcia, Dpt. Analisis Economico)

We report experimental evidence on the effect of observability of actions on bank runs. We model depositors' decision-making in a sequential framework, with three depositors located at the nodes of a network. Depositors observe the other depositors' actions only if connected by the network. A sufficient condition to prevent bank runs is that the second depositor to act is able to observe the first one's action (no matter what is observed). Experimentally, we find that observability of actions affects the likelihood of bank runs, but depositors' choice is highly influenced by the particular action that is being observed. This finding suggests a new source for the ocurrence of bank runs. Observability of actions can provoke runs that cannot be explained neither by coordination nor by fundamental problems, the two main culprits identified by the literature.

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File URL: http://www.uv.es/erices/RePEc/WP/2012/0812.pdf
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Paper provided by University of Valencia, ERI-CES in its series Discussion Papers in Economic Behaviour with number 0812.

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Date of creation: Jun 2012
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Handle: RePEc:dbe:wpaper:0812
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