UNCERTAINTY AVERSE BANK RUNNERS

Guido Cozzi () and Paolo E. Giordani

No 71, Working Papers from Sapienza University of Rome, Department of Public Economics

Abstract: In the framework of a Diamond-Dybvig-Peck-Shell banking model, in which a broad class of feasible contractual arrangements is allowed and which admits a run equilibrium, we stress the assumption that depositors are uncertain of their position in the queue when expecting a run. The formalization of the depositor's attitude towards this form of uncertainty is inspired by the multiple prior maxmin expected utility (MEU) theory axiomatized by Gilboa and Schmeidler (1989). We prove that there exists a positive measure set of subjective prior beliefs, obtained from the minimization over the set of admissible priors, for which the bank run equilibrium disappears. The implication is that `suspension schemes' are valuable since, in addition to the improvement in risk-sharing among agents (Wallace (1990)), they may undermine panic-driven bank runs.

Keywords: Uncertainty; Multi-Prior Beliefs; Suspension Schemes; Panic-Driven Bank Runs. (search for similar items in EconPapers)
JEL-codes: D81 G21 (search for similar items in EconPapers)
Date: 2004-05
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Working Paper: Uncertainty Averse Bank Runners
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