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Beliefs, Competition, and Bank Runs

Author

Listed:
  • Ted Temzelides

    (Federal Reserve Bank of Philadelphia)

  • Bernandino Adao

    (University of Minnesota)

Abstract

Within the framework of Diamond-Dybvig (1983), the optimal (run free) outcome is shown to be the unique forward induction equilibrium. In a version of the model that posits Bertrand competition among banks, there are sequential equilibria that imply positive profits. However, the zero-profit contract is supported as the unique equilibrium outcome if the agents' beliefs are restricted to the space of beliefs consistent with the forward induction refinement.

Suggested Citation

  • Ted Temzelides & Bernandino Adao, 1995. "Beliefs, Competition, and Bank Runs," Finance 9511001, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:9511001
    Note: 19 pages, TEX(SWP) file
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    References listed on IDEAS

    as
    1. Stephen D. Morris & Hyun Song Shin, 1995. "Informational events that trigger currency attacks," Working Papers 95-24, Federal Reserve Bank of Philadelphia.
    2. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 14-23.
    3. Robert J. Aumann, 2025. "Subjectivity and Correlation in Randomized Strategies," World Scientific Book Chapters, in: SELECTED CONTRIBUTIONS TO GAME THEORY, chapter 4, pages 73-113, World Scientific Publishing Co. Pte. Ltd..
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    5. Gul, Faruk & Pearce, David G., 1996. "Forward Induction and Public Randomization," Journal of Economic Theory, Elsevier, vol. 70(1), pages 43-64, July.
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    7. In-Koo Cho & David M. Kreps, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(2), pages 179-221.
    8. Neil Wallace, 1988. "Another attempt to explain an illiquid banking system: the Diamond and Dybvig model with sequential service taken seriously," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 12(Fall), pages 3-16.
    9. Kreps, David M & Wilson, Robert, 1982. "Sequential Equilibria," Econometrica, Econometric Society, vol. 50(4), pages 863-894, July.
    10. Green, Edward J. & Lin, Ping, 2003. "Implementing efficient allocations in a model of financial intermediation," Journal of Economic Theory, Elsevier, vol. 109(1), pages 1-23, March.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Guilherme Carmona & Patrick Leoni, 2003. "Equilibrium non-panic bank failures," Nova SBE Working Paper Series wp424, Universidade Nova de Lisboa, Nova School of Business and Economics.
    2. Harold Ngalawa & Fulbert Tchana Tchana & Nicola Viegi, 2016. "Banking instability and deposit insurance: The role of moral hazard," Journal of Applied Economics, Universidad del CEMA, vol. 19, pages 323-350, November.
    3. Guilherme Carmona, 2004. "On the existence of equilibrium bank runs in a Diamond-Dybvig environment," Nova SBE Working Paper Series wp448, Universidade Nova de Lisboa, Nova School of Business and Economics.
    4. González Pimienta,Carlos & Litan, Cristian M., 2005. "On the equivalence between subgame perfection and sequentiality," UC3M Working papers. Economics we052616, Universidad Carlos III de Madrid. Departamento de Economía.
    5. Carlos Pimienta & Cristian Litan, 2008. "Conditions for equivalence between sequentiality and subgame perfection," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 35(3), pages 539-553, June.
    6. Todd Kaplan, 2006. "Why banks should keep secrets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 27(2), pages 341-357, January.
    7. Carmona, Guilherme, 2007. "Bank failures caused by Large withdrawals: An explanation based purely on liquidity," Journal of Mathematical Economics, Elsevier, vol. 43(7-8), pages 818-841, September.
    8. Loewy Michael B., 2003. "``To Furnish an Elastic Currency'': Banking, Aggregate Risk, and Welfare," The B.E. Journal of Macroeconomics, De Gruyter, vol. 3(1), pages 1-19, March.
    9. Jefferson Bertolai & Ricardo Cavalcanti & Paulo Monteiro, 2014. "Run theorems for low returns and large banks," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 57(2), pages 223-252, October.

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    More about this item

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G - Financial Economics

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