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A Diamond-Dybvig Model Without Bank Run: the Power of Signaling

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  • Kiss, Hubert Janos

    () (Departamento de Análisis Económico (Teoría e Historia Económica). Universidad Autónoma de Madrid.)

Abstract

This paper introduces the possibility of signaling into a finite-depositor version of the Diamond-Dybvig model. More precisely, the decision to keep the funds in the bank is assumed to be unobservable,but depositors are allowed to make it observable by signaling, at a cost. Depositors decide consecutively whether to withdraw their funds or continue holding balances in the bank, and they choose if they want to signal the latter decision. If the cost of signaling is moderate, then bank runs do not occur. Moreover,no signals are made, so the unconstrained-efficient allocation is implemented without any costs.

Suggested Citation

  • Kiss, Hubert Janos, 2010. "A Diamond-Dybvig Model Without Bank Run: the Power of Signaling," Working Papers in Economic Theory 2010/06, Universidad Autónoma de Madrid (Spain), Department of Economic Analysis (Economic Theory and Economic History).
  • Handle: RePEc:uam:wpaper:201006
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    Keywords

    bank run; sequential game; signaling; iterated deletion of strictly dominated strategies; coordination.;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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