IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Do Social Networks Prevent Bank Runs?

  • Garcia-Rosa, Alfonso
  • Kiss, Hubert Janos
  • Rodriguez-Lara, Ismael

    (Departamentos y Servicios::Departamentos de la UMU::Fundamentos del Análisis Económico)

We develop, both theoretically and experimentally, a stereotypical environment that allows for co-ordination breakdown, leading to a bank run. Three depositors are located at the nodes of a network and have to decide whether to keep their funds deposited or to withdraw. One of the depositors has immediate liquidity needs, whereas the other two depositors do not. Depositors act sequentially and observe others’ actions only if connected by the network. Theoretically, a link connecting the first two depositors to decide is sufficient to avoid a bank run. However, our experimental evidence shows that subjects’choice is not a¤ected by the existence of the link per se. Instead, being observed and the particular action that is observed determine subjects’choice. Our results highlight the importance of initial decisions in the emergence of a bank run. In particular, Bayesian analysis reveals that subjects clearly depart from predicted behavior when observing a withdrawal.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://digitum.um.es/xmlui/bitstream/10201/9723/1/WPUMUFAE.2010.01.pdf?sequence=1
Download Restriction: no

Paper provided by DIGITUM. Universidad de Murcia in its series UMUFAE Economics Working Papers with number 9723.

as
in new window

Length: 20
Date of creation: Jan 2010
Date of revision:
Handle: RePEc:mur:wpaper:9723
Contact details of provider: Web page: http://www.um.es/fee/

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Hubert Janoss Kiss & Ismael Rodriguez Lara & Alfonso Rosa Garcia, 2011. "On the Effects of Deposit Insurance and Observability on Bank Runs: An Experimental Study," Discussion Papers in Economic Behaviour 0211, University of Valencia, ERI-CES.
  2. Schotter, Andrew & Yorulmazer, Tanju, 2009. "On the dynamics and severity of bank runs: An experimental study," Journal of Financial Intermediation, Elsevier, vol. 18(2), pages 217-241, April.
  3. Ennis, Huberto M. & Keister, Todd, 2009. "Run equilibria in the Green-Lin model of financial intermediation," Journal of Economic Theory, Elsevier, vol. 144(5), pages 1996-2020, September.
  4. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
  5. Rajkamal Iyer & Manju Puri, 2008. "Understanding bank runs: the importance of depositor-bank relationships and networks," Proceedings 1095, Federal Reserve Bank of Chicago.
  6. repec:cup:cbooks:9780521663465 is not listed on IDEAS
  7. Gary Gorton & Andrew Winton, 2002. "Financial Intermediation," NBER Working Papers 8928, National Bureau of Economic Research, Inc.
  8. Jordi Brandts & David J. Cooper, 2004. "Observability and Overcoming Coordination Failure in Organizations," UFAE and IAE Working Papers 630.04, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  9. Jordi Brandts & David Cooper, 2006. "Observability and overcoming coordination failure in organizations: An experimental study," Experimental Economics, Springer, vol. 9(4), pages 407-423, December.
  10. Martin Menner, 2009. "The role for search frictions for output and inflation dynamics: A Bayesian assessment," Working Papers. Serie AD 2009-06, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  11. Nikolaos Georgantzis & Carlos Gutiérrez-Hita, 2008. "Service provision on a network with endogenous consumption capacity," Working Papers. Serie AD 2008-01, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  12. Huberto M. Ennis & Todd Keister, 2009. "Bank Runs and Institutions: The Perils of Intervention," American Economic Review, American Economic Association, vol. 99(4), pages 1588-1607, September.
  13. Syngjoo Choi & Douglas Gale & Shachar Kariv & Thomas Palfrey, 2008. "Network Architecture, Salience and Coordination," Levine's Working Paper Archive 122247000000001997, David K. Levine.
  14. Karl Shell & James Peck, 2004. "Bank Portfolio Restrictions and Equilibrium Bank Runs," 2004 Meeting Papers 359, Society for Economic Dynamics.
  15. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
  16. Maliar, Lilia & Maliar, Serguei & Valli, Fernando, 2010. "Solving the incomplete markets model with aggregate uncertainty using the Krusell-Smith algorithm," Journal of Economic Dynamics and Control, Elsevier, vol. 34(1), pages 42-49, January.
  17. David Andolfatto & Ed Nosal & Neil Wallace, 2006. "The role of independence in the Green-Lin Diamond-Dybvig model," Working Paper 0615, Federal Reserve Bank of Cleveland.
  18. Chao Gu, 2007. "Herding and Bank Runs," Working Papers 0716, Department of Economics, University of Missouri.
  19. Choi, Syngjoo & Gale, Douglas & Kariv, Shachar, 2008. "Sequential equilibrium in monotone games: A theory-based analysis of experimental data," Journal of Economic Theory, Elsevier, vol. 143(1), pages 302-330, November.
  20. Giovanna Devetag & Andreas Ortmann, 2006. "When and Why? A Critical Survey on Coordination Failure in the Laboratory," CEEL Working Papers 0605, Cognitive and Experimental Economics Laboratory, Department of Economics, University of Trento, Italia.
  21. Itay Goldstein & Ady Pauzner, 2005. "Demand-Deposit Contracts and the Probability of Bank Runs," Journal of Finance, American Finance Association, vol. 60(3), pages 1293-1327, 06.
  22. Martha A. Starr & Rasim Yilmaz, 2006. "Bank Runs in Emerging-Market Economies: Evidence from Turkey’s Special Finance Houses," Working Papers 2006-08, American University, Department of Economics.
  23. Kosfeld Michael, 2004. "Economic Networks in the Laboratory: A Survey," Review of Network Economics, De Gruyter, vol. 3(1), pages 1-23, March.
  24. Carlos Oyarzun & Paan Jindapon, 2009. "Strategic truth and deception," Working Papers. Serie AD 2009-24, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  25. Cormac O Grada & Morgan Kelly, 2000. "Market Contagion: Evidence from the Panics of 1854 and 1857," American Economic Review, American Economic Association, vol. 90(5), pages 1110-1124, December.
  26. Huberto M. Ennis, 2003. "Economic fundamentals and bank runs," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 55-71.
  27. Garratt, Rod & Keister, Todd, 2009. "Bank runs as coordination failures: An experimental study," Journal of Economic Behavior & Organization, Elsevier, vol. 71(2), pages 300-317, August.
  28. 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.
  29. Rajkamal Iyer & Manju Puri, 2008. "Understanding Bank Runs: The Importance of Depositor-Bank Relationships and Networks," NBER Working Papers 14280, National Bureau of Economic Research, Inc.
  30. Naohiko Baba & Robert N McCauley & Srichander Ramaswamy, 2009. "US dollar money market funds and non-US banks," BIS Quarterly Review, Bank for International Settlements, March.
  31. Peck, James & Shell, Karl, 2001. "Equilibrium Bank Runs," Working Papers 01-10r, Cornell University, Center for Analytic Economics.
  32. Gorton, Gary, 1988. "Banking Panics and Business Cycles," Oxford Economic Papers, Oxford University Press, vol. 40(4), pages 751-81, December.
  33. Arifovic, Jasmina & Hua Jiang, Janet & Xu, Yiping, 2013. "Experimental evidence of bank runs as pure coordination failures," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2446-2465.
  34. Charles W. Calomiris & Joseph R. Mason, 2003. "Fundamentals, Panics, and Bank Distress During the Depression," American Economic Review, American Economic Association, vol. 93(5), pages 1615-1647, December.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:mur:wpaper:9723. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Enrique Mingorance Cano)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.