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Experimental evidence on bank runs with uncertain deposit coverage

Oana Peia and Radu Vranceanu ()

Journal of Banking & Finance, 2019, vol. 106, issue C, 214-226

Abstract: This paper studies depositor behavior in a bank run experiment with partial deposit insurance. In the experiment, depositors face two forms of uncertainty regarding their deposit coverage in the event of a bank run: (i) “intrinsic” uncertainty related to the size of the deposit insurance fund, and (ii) “strategic” uncertainty, as the actual coverage depends on the number of depositors who run on the bank. We consider three scenarios that differ in the way the deposit insurance scheme reimburses depositors. The results show that intrinsic uncertainty on its own has a negligible effect on the number of bank runs. However, when combined, the two forms of uncertainty exert a significant impact on the propensity to withdraw and result in a large number of bank runs. Moreover, runs are more frequent when leaving funds in the bank is an increasingly costly strategy.

Keywords: Bank runs; Deposit insurance; Coordination games; Global games (search for similar items in EconPapers)
JEL-codes: G21 G02 C91 D83 (search for similar items in EconPapers)
Date: 2019
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Handle: RePEc:eee:jbfina:v:106:y:2019:i:c:p:214-226