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Do Social Networks Prevent or Promote Bank Runs?

Author

Listed:
  • Hubert Janos Kiss

    () (Game Theory Research Group, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of SciencesAuthor-Name: Hubert J nos Kiss)

  • Ismael Rodriguez-Lara

    () (Middlesex University London Department of Economics and International Development)

  • Alfonso Rosa-Garcia

    () (Facultad de Ciencias Jur¡dicas y de la Empresa, Universidad Cat¢lica San Antonio.)

Abstract

We report experimental evidence on the effect of observability of actions on bank runs. We model depositors' decision-making in a sequential framework, with three depositors located at the nodes of a network. Depositors observe the other depositors' actions only if connected by the network. Theoretically, a sufficient condition to prevent bank runs is that the second depositor to act is able to observe the first one's action (no matter what is observed). Experimentally, we find that observability of actions affects the likelihood of bank runs, but depositors' choice is highly influenced by the particular action that is being observed. Depositors who are observed by others at the beginning of the line are more likely to keep their money deposited, leading to less bank runs. When withdrawals are observed, bank runs are more likely even when the mere observation of actions should prevent them.

Suggested Citation

  • Hubert Janos Kiss & Ismael Rodriguez-Lara & Alfonso Rosa-Garcia, 2013. "Do Social Networks Prevent or Promote Bank Runs?," CERS-IE WORKING PAPERS 1344, Institute of Economics, Centre for Economic and Regional Studies.
  • Handle: RePEc:has:discpr:1344
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    References listed on IDEAS

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    More about this item

    Keywords

    bank runs; social networks; coordination failures; experimental evidence;

    JEL classification:

    • C70 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - General
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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