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Suspension in a Global-Games version of the Diamond-Dybvig model

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  • Huang, Pidong

Abstract

This work builds on the model in Goldstein and Pauzner (GP) (2005), a global-games version of the Diamond-Dybvig (DD) (1983) model in which there is uncertainty about the long-term return and in which agents observe noisy signals about that return. GP limited their investigation to a banking contract that makes a noncontingent promised payoff to those who withdraw early until the bank's resources are exhausted. We amend the contract and permit suspension. As we show, there is a class of suspension policies that gives rise to uniqueness without requiring the new assumption introduced in a proof in GP; namely, the short-term return is also random. In general, both the GP policy and my generalization of it to allow suspension seem not to be the best banking contracts. However, if the return uncertainty is sufficiently small, then there are policies in the class we study that imply ex ante welfare close to the first-best outcome in DD, which itself is an upper bound on welfare in the model with return uncertainty.

Suggested Citation

  • Huang, Pidong, 2013. "Suspension in a Global-Games version of the Diamond-Dybvig model," MPRA Paper 46622, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:46622
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    File URL: https://mpra.ub.uni-muenchen.de/46622/1/MPRA_paper_46622.pdf
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    References listed on IDEAS

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    1. Morris, Stephen & Shin, Hyun Song, 1998. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," American Economic Review, American Economic Association, vol. 88(3), pages 587-597, June.
    2. 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.
    3. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
    4. 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, June.
    5. Ennis, Huberto M. & Keister, Todd, 2010. "Banking panics and policy responses," Journal of Monetary Economics, Elsevier, vol. 57(4), pages 404-419, May.
    6. James Peck & Karl Shell, 2003. "Equilibrium Bank Runs," Journal of Political Economy, University of Chicago Press, vol. 111(1), pages 103-123, February.
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    Cited by:

    1. Diego Moreno & Tuomas Takalo, 2016. "Optimal Bank Transparency," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(1), pages 203-231, February.

    More about this item

    Keywords

    Bank run: Global Game;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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