Hostname: page-component-78c5997874-dh8gc Total loading time: 0 Render date: 2024-11-02T21:12:57.641Z Has data issue: false hasContentIssue false
  • English
  • Français

BANK RUNS: THE PREDEPOSIT GAME

Published online by Cambridge University Press:  07 June 2018

Karl Shell  and
Yu Zhang
Karl Shell
Affiliation:
Cornell University
Yu Zhang*
Affiliation:
Xiamen University
*
Address correspondence to: Yu Zhang, Wang Yanan Institute for Studies in Economics (WISE), Xiamen University, Xiamen361005, Fujian Province, China; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

We analyze in some detail the full predeposit game in a simple, tractable, yet very rich, banking environment. How does run-risk affect the optimal deposit contract? If there is a run equilibrium in the postdeposit game, then the optimal contract in the predeposit game tolerates small-probability runs. However, this does not mean that small changes in run-risk are ignored. In some cases, the optimal contract becomes—as one would expect—strictly more conservative as the run-probability increases (until it switches to the best run-proof contract), and the equilibrium allocation is not a mere randomization over the equilibrium allocations from the postdeposit game. In other cases, the allocation is a mere randomization over the equilibria from the postdeposit game. In the first cases (the more intuitive cases), the incentive constraint does not bind. In the second cases, the incentive constraint does bind.

Keywords

Bank RunsPredeposit GameRun ProbabilitySunspots
Type
Articles
Information
Macroeconomic Dynamics , Volume 24 , Issue 2 , March 2020 , pp. 403 - 420
Copyright
© Cambridge University Press 2018

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We thank Huberto Ennis, Chao Gu, Todd Keister, Jim Peck, the referee, and the associate editor for their helpful comments.

References

REFERENCES

Andolfatto, David, Nosal, Ed, and Wallace, Neil (2007) The role of independence in the Green-Lin Diamond-Dybvig model. Journal of Economic Theory 137, 709–715.CrossRefGoogle Scholar
Bryant, John (1980) A model of reserves, bank runs, and deposit insurance. Journal of Banking and Finance 4, 335–344.CrossRefGoogle Scholar
Cooper, Russell and Ross, Thomas W. (1998) Bank runs: Liquidity costs and investment distortions. Journal of Monetary Economics 41, 27–38.CrossRefGoogle Scholar
Diamond, Douglas W. and Dybvig, Philip H. (1983) Bank runs, deposit insurance, and liquidity. Journal of Political Economy 91, 401–419.CrossRefGoogle Scholar
Ennis, Huberto M. and Keister, Todd (2005) Government policy and the probability of coordination failures. European Economic Review 49, 939–973.CrossRefGoogle Scholar
Ennis, Huberto M. and Keister, Todd (2006) Bank runs and investment decisions revisited. Journal of Monetary Economics 53, 217–232.CrossRefGoogle Scholar
Ennis, Huberto M. and Keister, Todd (2009) Run equilibria in the Green–Lin model of financial intermediation. Journal of Economic Theory 144, 1996–2020.CrossRefGoogle Scholar
Ennis, Huberto M. and Keister, Todd (2010) On the fundamental reasons for bank fragility. Federal Reserve Bank of Richmond Economic Quarterly 96, 33–58.Google Scholar
Goldstein, Itay and Pauzner, Ady (2005) Demand-deposit contracts and the probability of bank runs. Journal of Finance 60, 1293–1327.CrossRefGoogle Scholar
Gu, Chao (2011) Noisy sunspots and bank runs. Macroeconomic Dynamics 15, 398–418.CrossRefGoogle Scholar
Green, Edward J. and Lin, Ping (2003) Implementing efficient allocations in a model of financial intermediation. Journal of Economic Theory 109, 1–23.CrossRefGoogle Scholar
Nosal, Ed and Wallace, Neil (2009) Information revelation in the Diamond-Dybvig banking model. Federal Reserve Bank Chicago Policy discussion paper 7.Google Scholar
Peck, James and Shell, Karl (2003) Equilibrium bank runs. Journal of Political Economy 111, 103–123.CrossRefGoogle Scholar
Shell, Karl (2008) Sunspot equilibrium. In Blume, Lawrence E. and Durlauf, Steven N. (eds.), The New Palgrave: A Dictionary of Economics, 2nd ed., vol. 8, pp. 83–91. New York: Palgrave Macmillan.Google Scholar
Shell, Karl and Smith, Bruce D. (1992) Sunspot equilibrium. In Eatwell, John, Milgate, Murray and Newman, Peter (eds.), The New Palgrave Dictionary of Money and Finance, vol. 3, pp. 601–605. London: Macmillan.Google Scholar
Wallace, Neil (1988) Another attempt to explain an illiquid banking system: The Diamond and Dybvig model with sequential service taken seriously. Federal Reserve Bank of Minneapolis Quarterly Review 12, 3–16.Google Scholar
Wallace, Neil (1990) A banking model in which partial suspension is best. Federal Reserve Bank of Minneapolis Quarterly Review 14, 11–23.Google Scholar
Supplementary material: PDF

Shell and Zhang supplementary material

Shell and Zhang supplementary material 1

Download Shell and Zhang supplementary material(PDF)
PDF 396.5 KB
Supplementary material: File

Shell and Zhang supplementary material

Shell and Zhang supplementary material 2

Download Shell and Zhang supplementary material(File)
File 26.5 KB