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Evolution, coordination, and banking panics

  • Theodosios Temzelides

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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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 95-27.

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Date of creation: 1995
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Handle: RePEc:fip:fedpwp:95-27
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  1. Bruce Champ & Bruce D. Smith & Stephen D. Williamson, 1996. "Currency Elasticity and Banking Panics: Theory and Evidence," Canadian Journal of Economics, Canadian Economics Association, vol. 29(4), pages 828-64, November.
  2. M. Kandori & G. Mailath & R. Rob, 1999. "Learning, Mutation and Long Run Equilibria in Games," Levine's Working Paper Archive 500, David K. Levine.
  3. D. Foster & P. Young, 2010. "Stochastic Evolutionary Game Dynamics," Levine's Working Paper Archive 493, David K. Levine.
  4. V.V. Chari, 1989. "Banking without deposit insurance or bank panics: lessons from a model of the U.S. national banking system," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 3-19.
  5. Binmore Kenneth G. & Samuelson Larry & Vaughan Richard, 1995. "Musical Chairs: Modeling Noisy Evolution," Games and Economic Behavior, Elsevier, vol. 11(1), pages 1-35, October.
  6. Edward J. Green, 1995. "Implementing Efficient Allocations in a Model of Financial Intermediation," Meeting papers 9506001, EconWPA.
  7. M. Kandori & R. Rob, 2010. "Evolution of Equilibria in the Long Run: A General Theory and Applications," Levine's Working Paper Archive 502, David K. Levine.
  8. Rustichini, Aldo & Villamil, Anne P, 1996. "Intertemporal Pricing in Markets with Differential Information," Economic Theory, Springer, vol. 8(2), pages 211-27, August.
  9. James J. McAndrews & William Roberds, 1994. "Banks, payments, and coordination," Working Papers 94-20, Federal Reserve Bank of Philadelphia.
  10. Glen Ellison, 2010. "Learning, Local Interaction, and Coordination," Levine's Working Paper Archive 391, David K. Levine.
  11. J. Bergin & B. Lipman, 2010. "Evolution with State-Dependent Mutations," Levine's Working Paper Archive 486, David K. Levine.
  12. Charles W. Calomiris & Gary Gorton, 1991. "The Origins of Banking Panics: Models, Facts, and Bank Regulation," NBER Chapters, in: Financial Markets and Financial Crises, pages 109-174 National Bureau of Economic Research, Inc.
  13. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
  14. Jacklin, Charles J & Bhattacharya, Sudipto, 1988. "Distinguishing Panics and Information-Based Bank Runs: Welfare and Policy Implications," Journal of Political Economy, University of Chicago Press, vol. 96(3), pages 568-92, June.
  15. John C. Harsanyi & Reinhard Selten, 1988. "A General Theory of Equilibrium Selection in Games," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262582384, June.
  16. Chari, V V & Jagannathan, Ravi, 1988. " Banking Panics, Information, and Rational Expectations Equilibrium," Journal of Finance, American Finance Association, vol. 43(3), pages 749-61, July.
  17. Bryant, John, 1980. "A model of reserves, bank runs, and deposit insurance," Journal of Banking & Finance, Elsevier, vol. 4(4), pages 335-344, December.
  18. Villamil, A P, 1991. "Demand Deposit Contracts, Suspension of Convertibility, and Optimal Financial Intermediation," Economic Theory, Springer, vol. 1(3), pages 277-88, July.
  19. Young, H Peyton, 1993. "The Evolution of Conventions," Econometrica, Econometric Society, vol. 61(1), pages 57-84, January.
  20. Banerjee, Abhijit V, 1993. "The Economics of Rumours," Review of Economic Studies, Wiley Blackwell, vol. 60(2), pages 309-27, April.
  21. Lagunoff, Roger D & Matsui, Akihiko, 1995. "Evolution in Mechanisms for Public Projects," Economic Theory, Springer, vol. 6(2), pages 195-223, July.
  22. repec:att:wimass:9324 is not listed on IDEAS
  23. P. Young, 1999. "The Evolution of Conventions," Levine's Working Paper Archive 485, David K. Levine.
  24. Postlewaite, Andrew & Vives, Xavier, 1987. "Bank Runs as an Equilibrium Phenomenon," Journal of Political Economy, University of Chicago Press, vol. 95(3), pages 485-91, June.
  25. 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.
  26. Banerjee, Abhijit V, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, MIT Press, vol. 107(3), pages 797-817, August.
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