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Enriching information to prevent bank runs

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  • Cavalcanti, Ricardo de Oliveira
  • Monteiro, P. K.

Abstract

Sequential service in the banking sector, as modeled by Diamond and Dybvig (1983), is a barrier to full insurance and potential source of financial fragility against which deposit insurance is infeasible (Wallace, 1988). In this paper, we pursue a different perspective, viewing the sequence of contacts as opportunities to extract information through a larger message space with commitment to richer promises. As we show, if preferences satisfy a separating property then the desired elimination of dominated strategies (Green and Lin, 2003) occurs even when shocks are correlated. In this manner the sequential service promotes stability.

Suggested Citation

  • Cavalcanti, Ricardo de Oliveira & Monteiro, P. K., 2011. "Enriching information to prevent bank runs," FGV/EPGE Economics Working Papers (Ensaios Economicos da EPGE) 721, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  • Handle: RePEc:fgv:epgewp:721
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Andolfatto, David & Nosal, Ed & Sultanum, Bruno, 2014. "Preventing bank runs," Working Papers 2014-21, Federal Reserve Bank of St. Louis.
    2. J. D. P. Bertolai & R. de O. Cavalcanti, 2011. "High interest rates: the golden rule for bank stability in the Diamond-Dybvig model," Working Papers 14-2011, Universidade de São Paulo, Faculdade de Economia, Administração e Contabilidade de Ribeirão Preto.
    3. Jarrow, Robert & Xu, Liheng, 2015. "Bank runs and self-insured bank deposits," The Quarterly Review of Economics and Finance, Elsevier, vol. 58(C), pages 180-189.
    4. Bruno Sultanum, 2014. "Financial fragility and over-the-counter markets," 2014 Papers psu420, Job Market Papers.
    5. Cavalcanti, Ricardo de Oliveira & Bertolai, Jefferson Donizeti Pereira & Monteiro, P. K., 2011. "A note on convergence of Peck-Shell and Green-Lin mechanisms in the Diamond-Dybvig model," FGV/EPGE Economics Working Papers (Ensaios Economicos da EPGE) 722, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
    6. Andolfatto, David & Nosal, Ed & Sultanum, Bruno, 2017. "Preventing bank runs," Theoretical Economics, Econometric Society, vol. 12(3), September.

    More about this item

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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