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

Author

Listed:
  • Alfonso Rosa García

    (Universidad de Murcia)

  • Hubert Janos Kiss

    (Universidad Autónoma de Madrid)

  • Ismael Rodríguez Lara

    (Universidad de Alicante)

Abstract

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.

Suggested Citation

  • Alfonso Rosa García & Hubert Janos Kiss & Ismael Rodríguez Lara, 2011. "On the effects of deposit insurance and observability on bank runs: an experimental study," Working Papers. Serie AD 2011-05, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    • Handle: RePEc:ivi:wpasad:2011-05
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    References listed on IDEAS

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    More about this item

    Keywords

    deposit insurance; observability; bank runs; experimental economics;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General

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