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Evolution, coordination, and banking panics

Author

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  • Ted Temzelides

Abstract

I study equilibrium selection by an evolutionary process in an environment with multiple equilibria, one of which involves a banking panic. The analysis is built on a repeated version of the Diamod-Dybvig (1983) model. The optimal (run free) equilibrium is uniquely selected if it is also "risk dominant." Furthermore, the probability of observing a panic increases as the size of the banks decreases. I discuss local interaction and contagion effects that allow for a bankrun to spread first among banks in the same geographic location and then throughout the entire population.
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Suggested Citation

  • Ted Temzelides, 1995. "Evolution, coordination, and banking panics," Working Papers 95-27, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:95-27
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    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G - Financial Economics

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