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Asymmetric Information and Bank Runs

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Abstract

In the existing literature, panic-based bank runs are triggered by a commonly acknowledged and observed sunspot signal. There are only two equilibrium realizations resulting from the commonly observed sunspot signal: Everyone runs or no one runs. I consider a more general and more realistic situation in which consumers observe noisy private sunspot signals. If the noise in the signals is sufficiently small, there exists a proper correlated equilibrium for some demand deposit contracts. A full bank run, a partial bank run (in which some consumers panic whereas others do not), or no bank run occurs, depending on the realization of the sunspot signals. If the probabilities of runs are small, the optimal demand deposit contract tolerates full and partial bank runs.

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  • Chao Gu, 2010. "Asymmetric Information and Bank Runs," Working Papers 1005, Department of Economics, University of Missouri.
  • Handle: RePEc:umc:wpaper:1005
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    Cited by:

    1. Huberto M. Ennis & Todd Keister, 2007. "Commitment and equilibrium bank runs," Staff Reports 274, Federal Reserve Bank of New York.

    More about this item

    Keywords

    sunspot equilibrium; correlated equilibrium; imperfect coordination; imperfect information.;

    JEL classification:

    • 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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