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Uncertainty Averse Bank Runners

  • Guido Cozzi
  • Paolo E. Giordani

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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Paper provided by Business School - Economics, University of Glasgow in its series Working Papers with number 2008_03.

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Handle: RePEc:gla:glaewp:2008_03
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  1. 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.
  2. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
  3. Daniel Ellsberg, 2000. "Risk, Ambiguity and the Savage Axioms," Levine's Working Paper Archive 7605, David K. Levine.
  4. James Peck & Karl Shell, 2003. "Equilibrium Bank Runs," Journal of Political Economy, University of Chicago Press, vol. 111(1), pages 103-123, February.
  5. 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.
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