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Evolution, Coordination, and Banking Panics

  • Ted Temzelides

    (Federal Reserve Bank of Philadelphia)

I study equilibrium selection by an evolutionary process in an environment with multiple equilibria, one of which involves a banking panic. The analysis is built on a repeated version of the Diamod-Dybvig (1983) model. The optimal (run free) equilibrium is uniquely selected if it is also "risk dominant." Furthermore, the probability of observing a panic increases as the size of the banks decreases. I discuss local interaction and contagion effects that allow for a bankrun to spread first among banks in the same geographic location and then throughout the entire population.

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Paper provided by EconWPA in its series Finance with number 9511002.

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Length: 26 pages
Date of creation: 22 Nov 1995
Date of revision:
Handle: RePEc:wpa:wuwpfi:9511002
Note: 26 pages, TEX(SWP) file
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Kandori, Michihiro & Mailath, George J & Rob, Rafael, 1993. "Learning, Mutation, and Long Run Equilibria in Games," Econometrica, Econometric Society, vol. 61(1), pages 29-56, January.
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  3. Binmore Kenneth G. & Samuelson Larry & Vaughan Richard, 1995. "Musical Chairs: Modeling Noisy Evolution," Games and Economic Behavior, Elsevier, vol. 11(1), pages 1-35, October.
  4. Kandori Michihiro & Rob Rafael, 1995. "Evolution of Equilibria in the Long Run: A General Theory and Applications," Journal of Economic Theory, Elsevier, vol. 65(2), pages 383-414, April.
  5. Edward J. Green, 1995. "Implementing Efficient Allocations in a Model of Financial Intermediation," Meeting papers 9506001, EconWPA.
  6. Jacklin, Charles J & Bhattacharya, Sudipto, 1988. "Distinguishing Panics and Information-Based Bank Runs: Welfare and Policy Implications," Journal of Political Economy, University of Chicago Press, vol. 96(3), pages 568-92, June.
  7. J. Bergin & B. Lipman, 2010. "Evolution with State-Dependent Mutations," Levine's Working Paper Archive 486, David K. Levine.
  8. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  9. Chari, V V & Jagannathan, Ravi, 1988. " Banking Panics, Information, and Rational Expectations Equilibrium," Journal of Finance, American Finance Association, vol. 43(3), pages 749-61, July.
  10. Bryant, John, 1980. "A model of reserves, bank runs, and deposit insurance," Journal of Banking & Finance, Elsevier, vol. 4(4), pages 335-344, December.
  11. Binmore, K. & Samuelson, L. & Vaughan, R., 1993. "Musical Chairs: Modelling Noisy Evolution," Working papers 9324, Wisconsin Madison - Social Systems.
  12. Ellison, Glenn, 1993. "Learning, Local Interaction, and Coordination," Econometrica, Econometric Society, vol. 61(5), pages 1047-71, September.
  13. 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, issue Fall, pages 3-16.
  14. James J. McAndrews & William Roberds, 1994. "Banks, payments, and coordination," FRB Atlanta Working Paper 94-14, Federal Reserve Bank of Atlanta.
  15. V. V. Chari, 1989. "Banking without deposit insurance or bank panics: lessons from a model of the U.S. national banking system," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 3-19.
  16. Lagunoff, Roger D & Matsui, Akihiko, 1995. "Evolution in Mechanisms for Public Projects," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 6(2), pages 195-223, July.
  17. Abhijit V. Banerjee, 1992. "A Simple Model of Herd Behavior," The Quarterly Journal of Economics, Oxford University Press, vol. 107(3), pages 797-817.
  18. Bruce Champ & Bruce D. Smith & Stephen D. Williamson, 1996. "Currency Elasticity and Banking Panics: Theory and Evidence," Canadian Journal of Economics, Canadian Economics Association, vol. 29(4), pages 828-64, November.
  19. John C. Harsanyi & Reinhard Selten, 1988. "A General Theory of Equilibrium Selection in Games," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262582384.
  20. Young, H Peyton, 1993. "The Evolution of Conventions," Econometrica, Econometric Society, vol. 61(1), pages 57-84, January.
  21. Abhijit V. Banerjee, 1993. "The Economics of Rumours," Review of Economic Studies, Oxford University Press, vol. 60(2), pages 309-327.
  22. P. Young, 1999. "The Evolution of Conventions," Levine's Working Paper Archive 485, David K. Levine.
  23. Aldo Rustichini & Anne P. Villamil, 1996. "Intertemporal pricing in markets with differential information," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 8(2), pages 211-227.
  24. Charles W. Calomiris & Gary Gorton, . "The Origins of Banking Panics: Models, Facts, and Bank Regulation," Rodney L. White Center for Financial Research Working Papers 11-90, Wharton School Rodney L. White Center for Financial Research.
  25. D. Foster & P. Young, 2010. "Stochastic Evolutionary Game Dynamics," Levine's Working Paper Archive 493, David K. Levine.
  26. Postlewaite, Andrew & Vives, Xavier, 1987. "Bank Runs as an Equilibrium Phenomenon," Journal of Political Economy, University of Chicago Press, vol. 95(3), pages 485-91, June.
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