Uncertainty Averse Bank Runners
In the framework of a Diamond-Dybvig-Peck-Shell banking model, in which a broad class of feasible contractual arrangements is allowed and which admits a run equilibrium, we stress the assumption that depositors are uncertain of their position in the queue when expecting a run. The formalization of the depositor's attitude towards this form of uncertainty is inspired by the multiple prior maxmin expected utility (MEU) theory axiomatized by Gilboa and Schmeidler (1989). We prove that there exists a positive measure set of subjective prior beliefs, obtained from the minimization over the set of admissible priors, for which the bank run equilibrium disappears. The implication is that `suspension schemes' are valuable since, in addition to the improvement in risk-sharing among agents (Wallace (1990)), they may undermine panic-driven bank runs.
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- Douglas W. Diamond & Philip H. Dybvig, 2000.
"Bank runs, deposit insurance, and liquidity,"
Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
- 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 401-419, June.
- Daniel Ellsberg, 2000. "Risk, Ambiguity and the Savage Axioms," Levine's Working Paper Archive 7605, David K. Levine.
- Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
- Itzhak Gilboa & David Schmeidler, 1989. "Maxmin Expected Utility with Non-Unique Prior," Post-Print hal-00753237, HAL.
- James Peck & Karl Shell, 2003. "Equilibrium Bank Runs," Journal of Political Economy, University of Chicago Press, vol. 111(1), pages 103-123, February.
- Peck, James & Shell, Karl, 2001. "Equilibrium Bank Runs," Working Papers 01-10r, Cornell University, Center for Analytic Economics.
- 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. Full references (including those not matched with items on IDEAS)
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