A Diamond-Dybvig model without bank run: the power of signaling

Hubert Janos Kiss

Cuadernos de Economía - Spanish Journal of Economics and Finance, 2011, vol. 34, issue 94, 20-26

Abstract: This paper introduces the possibility of signaling into a finite-depositor version of the Diamond-Dybvig model. More precisely, the decision to keep the funds in the bank is assumed to be unobservable, but depositors are allowed to make it observable by signaling, at a cost. Depositors consecutively decide whether to withdraw their funds or continue holding balances in the bank, and they choose if they want to signal the latter decision. If the cost of signaling is moderate, then bank runs do not occur. Moreover, in the unique outcome no signals are made, so the unconstrained-efficient allocation is implemented without any costs.

Keywords: Bank run; Sequential game; Signaling; Iterated deletion of strictly dominated strategies; Coordination (search for similar items in EconPapers)
JEL-codes: C72 D82 G21 (search for similar items in EconPapers)
Date: 2011
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Working Paper: A Diamond-Dybvig Model Without Bank Run: the Power of Signaling (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:cud:journl:v:34:y:2011:i:94:p:20-26

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