Bank runs and self-insured bank deposits

Robert Jarrow () and Liheng Xu

The Quarterly Review of Economics and Finance, 2015, vol. 58, issue C, 180-189

Abstract: This paper studies bank runs in an extended Diamond and Dybvig model. The model is extended in two ways. One, agents have heterogeneous wealth and two, banks can invest in both liquid and illiquid assets. We argue that the underlying reason for bank runs is ambiguous property rights. Sequential conversion is an example of such ambiguity. Demand deposit insurance eliminates this ambiguity. In this regard, we characterize conditions on the economy where banks can preclude bank runs as an equilibrium by self-insuring their deposits with an FDIC deposit insurance like contract.

Keywords: Bank runs; Deposit insurance; Liquid and illiquid assets; Nash equilibrium (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:58:y:2015:i:c:p:180-189

DOI: 10.1016/j.qref.2015.02.006

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