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Beliefs, competition, and bank runs

  • Bernadino Adao
  • Theodosios Temzelides

Within the framework of Diamond-Dybvig (1983), the optimal (run free) outcome is shown to be the unique forward induction equilibrium. In a version of the model that posits Bertrand competition among banks, there are sequential equilibria that imply positive profits. However, the zero-profit contract is supported as the unique equilibrium outcome if the agents' beliefs are restricted to the space of beliefs consistent with the forward induction refinement.

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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 95-26.

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Date of creation: 1995
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Handle: RePEc:fip:fedpwp:95-26
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  1. G. Noldeke & L. Samuelson, 2010. "An Evolutionary Analysis of Backward and Forward Induction," Levine's Working Paper Archive 538, David K. Levine.
  2. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  3. David Kreps & Robert Wilson, 1998. "Sequential Equilibria," Levine's Working Paper Archive 237, David K. Levine.
  4. Gul, Faruk & Pearce, David G., 1996. "Forward Induction and Public Randomization," Journal of Economic Theory, Elsevier, vol. 70(1), pages 43-64, July.
  5. Basu, K. & Weibull, J., 1990. "Strategy Subsets Closed Under Rational Behavior," Papers 62, Princeton, Woodrow Wilson School - Discussion Paper.
  6. Edward J. Green, 1995. "Implementing Efficient Allocations in a Model of Financial Intermediation," Meeting papers 9506001, EconWPA.
  7. AUMANN, Robert J., . "Subjectivity and correlation in randomized strategies," CORE Discussion Papers RP -167, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. In-Koo Cho & David M. Kreps, 1997. "Signaling Games and Stable Equilibria," Levine's Working Paper Archive 896, David K. Levine.
  9. Stephen Morris & Hyun Song Shin, 1995. "Informational events that trigger currency attacks," Working Papers 95-24, Federal Reserve Bank of Philadelphia.
  10. Neil Wallace, 1988. "Another attempt to explain an illiquid banking system: the Diamond and Dybvig model with sequential service taken seriously," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 3-16.
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