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Evolution, Coordination, and Banking Panics

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  • Ted Temzelides

    (Federal Reserve Bank of Philadelphia)

Abstract

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.

Suggested Citation

  • Ted Temzelides, 1995. "Evolution, Coordination, and Banking Panics," Finance 9511002, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:9511002
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    as
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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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