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Optimal Bank Runs without Self-Fulfilling Prophecies

  • Haibin Zhu

    (Duke University)

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    This paper extends the standard Diamond-Dybvig model for a general equilibrium in which depositors make their withdrawal decisions sequentially and banks strategically choose their contracts. There is a unique Subgame Perfect Nash Equilibrium (SPNE) in the decentralized economy. Bank runs can occur when depositors perceive a low return on bank assets. When information is imperfect, bank runs can happen even when the economy is in a good state. A representative bank can earn positive profits in equilibrium due to the sequential service constraint. When there are several risky projects available, the high-risk technology may be chosen as a socially efficient solution.

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    File URL: http://fmwww.bc.edu/RePEc/es2000/1753.pdf
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    Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1753.

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    Date of creation: 01 Aug 2000
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    Handle: RePEc:ecm:wc2000:1753
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    18. Russell Cooper & Thomas W. Ross, 2002. "Bank Runs: Deposit Insurance and Capital Requirements," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(1), pages 55-72, February.
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