Run equilibria in the Green-Lin model of financial intermediation

We study the Green and Lin [J. Econ. Theory 109 (2003) 1-23] model of financial intermediation under a more general specification of the distribution of types across agents. We derive the efficient allocation in closed form. We show that, in some cases, the intermediary cannot uniquely implement the efficient allocation using a direct revelation mechanism. In these cases, the mechanism also admits an equilibrium in which some (but not all) agents “run” on the intermediary and withdraw their funds regardless of their true liquidity needs. In other words, self-fulfilling runs can arise in a generalized Green-Lin model and these runs are necessarily partial, with only some agents participating. Forthcoming in the Journal of Economic Theory. We thank seminar participants at the Federal Reserve Banks of Chicago, New York, Philadelphia and Richmond; the Ohio State University; the Cornell Penn State Macroeconomics Workshop; the Midwest Macroeconomics Meeting; North American Meeting of the Econometric Society; the annual meeting of the Society for Economic Dynamics; and the Conference on Money, Credit and Policy at Washington University for useful comments. We are especially grateful to Marco Bassetto, Ed Green, Ed Nosal, Jim Peck, Neil Wallace, Yaron Azrieli, the associate editor and two anonymous referees. Ennis acknowledges the financial support of the Ministry of Science and Technology in Spain (Projects 2008/00439/001 and 2009/00071/001). The views expressed in this paper are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York, the Federal Reserve Bank of Richmond, or the Federal Reserve System.