Asymmetric Information and Bank Runs

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Asymmetric Information and Bank Runs

Please use this identifier to cite or link to this item: http://hdl.handle.net/10355/2555

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Title: Asymmetric Information and Bank Runs
Author: Gu, Chao
Keywords: randomizing device
sunspot equilibrium
correlated equilibrium
imperfect information
Date: 2007-10-12
Publisher: Department of Economics
Citation: Department of Economics, 2007
Series/Report no.: Working papers (Department of Economics);WP 07-21
Abstract: It is known that sunspots can trigger panic-based bank runs and that the optimal banking contract can tolerate panic-based runs. The existing literature assumes that these sunspots are based on a publicly observed, extrinsic randomizing device. In this paper, I extend the analysis of panic-based runs to include an asymmetric-information, extrinsic randomizing device. Depositors observe different, but correlated, signals on the stability of the bank. I find that if the signals that depositors obtain are highly correlated, there exists a correlated equilibrium for some demand deposit contracts. In this equilibrium, a full bank run, a partial bank run, or non-bank run occurs depending on the realization of the signals. Computed examples indicate that in some economies, a demand-deposit contract that tolerates bank runs and partial bank runs is optimal, whereas in some other economies a run-proof contract is optimal.
URI: http://hdl.handle.net/10355/2555

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  • Economics publications (MU) [120]
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