Information Acquisition in Rumor-Based Bank Runs

We study the endogenous information acquisition and withdrawal-redeposit decisions of individual agents when a liquidity event triggers a spreading rumor and therefore exposes a bank to a run. Uncertainty about the bank’s liquidity and potential failure motivates agents who hear the rumor to acquire additional information. Although the bank run equilibrium is unique given the additional signal’s quality, multiple equilibria emerge with endogenous information acquisition activities. A bank run equilibrium exists when agents aggressively acquire information. We study the threshold parameters that eliminate bank runs. Public provision of solvency information (e.g. stress tests) can eliminate bank runs by indirectly crowding-out individual depositors’ effort to acquire liquidity information. However, providing too much information that slightly differentiates competing solvent-but-illiquid banks can result in inefficient runs. JEL Classification: D8, G2