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Experimental evidence on bank runs under partial deposit insurance

Author

Listed:
  • Oana Peia

    (UCD - University College Dublin [Dublin])

  • Radu Vranceanu

    () (THEMA - Théorie économique, modélisation et applications - UCP - Université de Cergy Pontoise - Université Paris-Seine - CNRS - Centre National de la Recherche Scientifique, Essec Business School)

Abstract

This paper presents experimental evidence on depositor behavior under partial deposit insurance schemes. In the experiment, the size of a deposit insurance fund cannot fully cover all deposits and the level of insurance depends on the number of depositors running on the bank. We show that this form of strategic uncertainty about deposit coverage exerts a signi ficant impact on the propensity to withdraw, and results in a large frequency of bank runs. Runs are more likely when depositors have noisy information about the size of the insurance fund and as the maximum coverage increases, in line with a risk-dominant equilibrium selection mechanism. From a policy perspective, our results emphasize the limits of underfunded deposit insurance schemes in preventing systemic banking crises.

Suggested Citation

  • Oana Peia & Radu Vranceanu, 2017. "Experimental evidence on bank runs under partial deposit insurance," Working Papers hal-01510692, HAL.
  • Handle: RePEc:hal:wpaper:hal-01510692
    Note: View the original document on HAL open archive server: https://hal-essec.archives-ouvertes.fr/hal-01510692
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    References listed on IDEAS

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    11. van Damme, E.E.C. & Carlsson, H., 1993. "Equilibrium selection in stag hunt games," Other publications TiSEM 8951ae88-c6e4-42e6-b253-b, Tilburg University, School of Economics and Management.
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    Keywords

    Bank runs; Deposit insurance; Risk dominance; Global games;

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