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On the effects of deposit insurance and observability on bank runs: an experimental study

  • Alfonso Rosa García

    (Universidad de Murcia)

  • Hubert Janos Kiss

    (Universidad Autónoma de Madrid)

  • Ismael Rodríguez Lara

    (Universidad de Alicante)

We study the effects of deposit insurance and observability of previous actions on the emergence of bank runs by means of a controlled laboratory experiment. We consider three depositors in the line of a bank, who decide between withdrawing or keeping their money deposited. We have three treatments with different levels of deposit insurance which reflect the losses a depositor may incur in the case of a bank run. We find that different levels of deposit insurance and the possibility of observing other depositors’ actions affect the likelihood of bank runs. When decisions are not observable, higher levels of deposit insurance decrease the probability of bank runs. When decisions are observable, this is not the case. These results suggest that (i) observability might be considered as a partial substitute of deposit insurance, and that (ii) the optimal deposit insurance should take into account the degree of observability.

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File URL: http://www.ivie.es/downloads/docs/wpasad/wpasad-2011-05.pdf
File Function: Fisrt version / Primera version, 2011
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Paper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie AD with number 2011-05.

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Length: 1 pages
Date of creation: Feb 2011
Date of revision:
Publication status: Published by Ivie
Handle: RePEc:ivi:wpasad:2011-05
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  1. Maliar, Serguei & Maliar, Lilia & Judd, Kenneth, 2011. "Solving the multi-country real business cycle model using ergodic set methods," Journal of Economic Dynamics and Control, Elsevier, vol. 35(2), pages 207-228, February.
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