A bank runs model with a continuum of types

Yaron Azrieli and James Peck

Journal of Economic Theory, 2012, vol. 147, issue 5, 2040-2055

Abstract: We consider a bank runs model à la Diamond and Dybvig (1983) [3] with a continuum of agent types, indexed by the degree of patience. Much of our understanding based on the two-type model must be modified. The endogenous determination of a cutoff type is central to the analysis. In the case where the bank can credibly commit to a contract, the optimal contract results in socially excessive early withdrawals in every equilibrium of the post-deposit subgame. Thus, even at the best equilibrium the socially efficient outcome is not achieved, and agentsʼ behavior exhibits features of a bank run. In the case where commitment is not possible, there are strictly more early withdrawals and strictly lower welfare than the full-commitment equilibrium.

Keywords: Bank runs; Continuum of types; Optimal bank contract; Commitment (search for similar items in EconPapers)
JEL-codes: C72 D82 E59 G21 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:147:y:2012:i:5:p:2040-2055

DOI: 10.1016/j.jet.2012.05.002

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