Optimal Bank Runs without Self-Fulfilling Prophecies

Haibin Zhu
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Haibin Zhu: Duke University

No 1753, Econometric Society World Congress 2000 Contributed Papers from Econometric Society

Abstract: This paper extends the standard Diamond-Dybvig model for a general equilibrium in which depositors make their withdrawal decisions sequentially and banks strategically choose their contracts. There is a unique Subgame Perfect Nash Equilibrium (SPNE) in the decentralized economy. Bank runs can occur when depositors perceive a low return on bank assets. When information is imperfect, bank runs can happen even when the economy is in a good state. A representative bank can earn positive profits in equilibrium due to the sequential service constraint. When there are several risky projects available, the high-risk technology may be chosen as a socially efficient solution.

Date: 2000-08-01
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