Equilibrium Bank Runs Revisied

Ed Nosal, Bruno Sultanum and David Andolfatto ()

No 1142, 2014 Meeting Papers from Society for Economic Dynamics

Abstract: Peck and Shell (2003) show that equilibrium bank runs are possible in the Diamond and Dybvig (1983)environment. We show that their result is an artifact of their restriction to direct mechanisms. That is, their bank contract is not an optimal one. We show that an indirect mechanism eliminates the possibility of bank-run equilibria and implements the socially efficient outcome. The optimal mechanism can be interpreted as a form of deposit insurance.

Date: 2014
New Economics Papers: this item is included in nep-ban, nep-dge and nep-mic
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Working Paper: Preventing bank runs (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed014:1142

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