Uncertainty Averse Bank Runners
Bank runs are relatively rare events characterized by highly pessimistic depositor’s expectations. How would pessimistic depositors expect to be treated in a bank run? How will this affect their behaviour? How can Banks handle this kind of risk? In the framework of a Diamond-Dybvig- Peck-Shell banking model, in which a broad class of feasible contractual arrangements (including .suspension schemes.) is allowed and which admits a run equilibrium, we analyze a scenario in which depositors are uncertain of their treatment should a run occur. We check whether bank runs are more likely or less likely to happen, in particular, if depositors are maxmin decision makers. We assess the utility of suspension schemes in the presence of pessimistic bank runners.
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- Douglas W. Diamond & Philip H. Dybvig, 2000.
"Bank runs, deposit insurance, and liquidity,"
Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
- 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 401-419, June.
- Daniel Ellsberg, 2000. "Risk, Ambiguity and the Savage Axioms," Levine's Working Paper Archive 7605, David K. Levine.
- James Peck & Karl Shell, 2003. "Equilibrium Bank Runs," Journal of Political Economy, University of Chicago Press, vol. 111(1), pages 103-123, February.
- Peck, James & Shell, Karl, 2001. "Equilibrium Bank Runs," Working Papers 01-10r, Cornell University, Center for Analytic Economics.
- Edward J. Green & Ping Lin, 2000. "Diamond and Dybvig's classic theory of financial intermediation : what's missing?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 3-13.
- Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
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