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An Experiment on the Causes of Bank Run Contagions

Author

Listed:
  • Surajeet Chakravarty

    (Department of Economics, University of Exeter)

  • Miguel A. Fonseca

    (Department of Economics, University of Exeter)

  • Todd Kaplan

    (Department of Economics, University of Exeter)

Abstract

To understand the mechanisms behind bank run contagions, we conduct bank run experiments in a modified Diamond-Dybvig setup with two banks (Left and Right). The banks' liquidity levels are either linked or independent. Left Bank depositors see their bank's liquidity level before deciding. Right Bank depositors only see Left Bank withdrawals before deciding. We find that Left Bank depositors' actions signicantly affect Right Bank depositors' behavior, even when liquidities are independent. Furthermore, a panic may be a one-way street: an increase in Left Bank withdrawals can cause a panic run on the Right Bank, but a decrease cannot calm markets.

Suggested Citation

  • Surajeet Chakravarty & Miguel A. Fonseca & Todd Kaplan, 2012. "An Experiment on the Causes of Bank Run Contagions," Discussion Papers 1206, Exeter University, Department of Economics.
  • Handle: RePEc:exe:wpaper:1206
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    File URL: http://people.exeter.ac.uk/RePEc/dpapers/DP1206.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. John Duffy & Aikaterini Karadimitropoulou & Melanie Parravano, 2016. "Financial Contagion in the Laboratory: Does Network Structure Matter?," Working Papers 151608, University of California-Irvine, Department of Economics.
    2. repec:eee:jeborg:v:145:y:2018:i:c:p:495-510 is not listed on IDEAS
    3. Douglas D. Davis & Robert J. Reilly, 2016. "On Freezing Depositor Funds at Financially Distressed Banks: An Experimental Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(5), pages 989-1017, August.
    4. repec:eee:ecolet:v:162:y:2018:i:c:p:146-149 is not listed on IDEAS
    5. Oana Peia & Radu Vranceanu, 2017. "Experimental evidence on bank runs under partial deposit insurance," Working Papers hal-01510692, HAL.
    6. Eloisa Campioni & Vittorio Larocca & Loredana Mirra & Luca Panaccione, 2017. "Financial literacy and bank runs: an experimental analysis," CEIS Research Paper 402, Tor Vergata University, CEIS, revised 07 Jul 2017.
    7. Tao Xu & Jianmin He & Shouwei Li, 2016. "Multi-Channel Contagion In Dynamic Interbank Market Network," Advances in Complex Systems (ACS), World Scientific Publishing Co. Pte. Ltd., vol. 19(06n07), pages 1-25, September.
    8. repec:eee:jeborg:v:144:y:2017:i:c:p:87-96 is not listed on IDEAS
    9. Brown, Martin & Trautmann, Stefan T. & Vlahu, Razvan, 2014. "Understanding bank-run contagion," Working Paper Series 1711, European Central Bank.
    10. Subhasish M. Chowdhury & Dan Kovenock & David Rojo Arjona & Nathaniel T. Wilcox, 2016. "Focality and Asymmetry in Multi-battle Contests," Working Papers 16-16, Chapman University, Economic Science Institute.
    11. Jasmina Arifovic & Janet Hua Jiang, 2014. "Do Sunspots Matter? Evidence from an Experimental Study of Bank Runs," Staff Working Papers 14-12, Bank of Canada.
    12. Martin Dufwenberg, 2014. "Banking on Experiments?," Working Papers 534, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    13. Maria Semenova, 2018. "A Bank Run in a Classroom: Do Smart Depositors Withdraw on Time?," HSE Working papers WP BRP 64/FE/2018, National Research University Higher School of Economics.
    14. Kiss, Hubert J. & Rodriguez-Lara, Ismael & Rosa-Garcia, Alfonso, 2018. "Panic bank runs," Economics Letters, Elsevier, vol. 162(C), pages 146-149.
      • Hubert Janos Kiss & Ismael Rodriguez-Lara & Alfonso Rosa-Garcia, 2017. "Panic bank runs," IEHAS Discussion Papers 1710, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
    15. Ciril Bosch-Rosa, 2014. "That's how we roll: an experiment on rollover risk," SFB 649 Discussion Papers SFB649DP2014-048, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.

    More about this item

    Keywords

    bank runs; contagion; experiment; multiple equilibria.;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection

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