Equilibrium Bank Runs
نویسنده
چکیده
We analyze a banking system in which the class of feasible deposit contracts, or mechanisms, is broad. The mechanisms must satisfy a sequential service constraint, but partial or full suspension of convertibility is allowed. Consumers must be willing to deposit, ex ante. We show, by examples, that under the socalled “optimal contract,” the post-deposit game can have a run equilibrium. Given a propensity to run, triggered by sunspots, the optimal contract for the full pre-deposit game can be consistent with runs that occur with positive probability. Thus, the Diamond-Dybvig framework can explain bank runs as emerging in equilibrium under the optimal deposit-contract. Journal of Economic Literature Classification Numbers: D82, G21, E42.
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