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Commitment and Equilibrium Bank Runs

  • Todd Keister

    (Federal Reserve Bank of New York)

  • Huberto M. Ennis

    (Federal Reserve Bank of Richmond)

We study the role of commitment in a version of the Diamond and Dybvig (JPE, 1983) model with no aggregate uncertainty. As is well known, the banking authority can eliminate the possibility of a bank run by committing to suspend payments to depositors if a run were to start. We show, however, that in an environment without commitment the banking authority will choose to only partially suspend payments during a run. In some cases, the reduction in early payouts under this partial suspension is insufficient to convince depositors to not participate in the run. Bank runs can then occur with positive probability in equilibrium. The fraction of depositors participating in such a run is stochastic and can be arbitrarily close to one.

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Paper provided by Society for Economic Dynamics in its series 2007 Meeting Papers with number 509.

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Date of creation: 2007
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Handle: RePEc:red:sed007:509
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  9. Gu, Chao, 2007. "Asymmetric Information and Bank Runs," Working Papers 07-14, Cornell University, Center for Analytic Economics.
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  20. Todd Keister & Huberto M. Ennis, 2004. "Bank Runs and Investment Decisions Revisited," 2004 Meeting Papers 180, Society for Economic Dynamics.
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