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Herding and Bank Runs

  • Gu, Chao

    (U of Missouri, Columbia)

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Traditional models of bank runs do not allow for herding effects, because in these models withdrawal decisions are assumed to be made simultaneously. I extend the banking model to allow a depositor to choose his withdrawal time. When he withdraws depends on his liquidity type (patient or impatient), his private, noisy signal about the quality of the bank's portfolio, and the withdrawal histories of the other depositors. In some cases, the optimal banking contract permits herding runs. Some of these "runs" are efficient in that the bank is liquidated before the portfolio worsens. Others are not efficient; these are cases in which the herd is misled.

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Paper provided by Cornell University, Center for Analytic Economics in its series Working Papers with number 07-15.

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Date of creation: Oct 2007
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Handle: RePEc:ecl:corcae:07-15
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