On the Effects of Deposit Insurance and Observability on Bank Runs: An Experimental Study

Hubert Janos Kiss, Ismael Rodriguez Lara () and Alfonso Rosa Garcia ()
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Ismael Rodriguez Lara: ERI-CES
Alfonso Rosa Garcia: University of Murcia
Authors registered in the RePEc Author Service: Ismael Rodriguez-Lara and Alfonso Rosa-García

No 211, Discussion Papers in Economic Behaviour from University of Valencia, ERI-CES

Abstract: We study the effects of deposit insurance and observability of previous actions on the emergence of bank runs by means of a controlled laboratory experiment. We consider three depositors in the line of a common bank. Depositors decide in sequence between withdrawing or keeping their money deposited. We have three different treatments in which depositors who keep the money have full insurance, are partially insured, or not insured at all in case of a bank run. We find that different levels of deposit insurance and the possibility of observing other depositors' actions reduce the likelihood of bank runs. The effect of these variables is not independent. Our data suggest that optimal deposit insurance should take into account the degree of observability: full and partial insurance are equally effective when decisions are observable, whereas full insurance is more likely to prevent bank runs when depositors do not observe other depositors' decisions.

Keywords: deposit insurance; observability; bank runs; experimental economics (search for similar items in EconPapers)
JEL-codes: C90 G21 (search for similar items in EconPapers)
Date: 2011-02
New Economics Papers: this item is included in nep-ban, nep-cis, nep-exp and nep-ias
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Citations: View citations in EconPapers (10)

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Related works:
Journal Article: On the Effects of Deposit Insurance and Observability on Bank Runs: An Experimental Study (2012)
Journal Article: On the Effects of Deposit Insurance and Observability on Bank Runs: An Experimental Study (2012)
Working Paper: On the effects of deposit insurance and observability on bank runs: an experimental study (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:dbe:wpaper:0211

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