Bank Runs and Costly Information

Maria Semenova

Journal of the New Economic Association, 2011, issue 10, 31-52

Abstract: In this paper, we model the deposit market with costly information on bank risks. The model adds to the volume of literature related to the Diamond-Dybvig mod-el and related models of information-based bank runs. The inclusion of costly infor-mation signals indicates that depositors must decide whether to pay for information regarding changes in the riskiness of banking activities; these costs may involve, for instance, time and other resources needed to find and read financial information. We show that an efficient bank run is the only equilibrium even in case of non-negative information costs. To ensure the uniqueness of the efficient bank run equilibrium it is enough to lower the costs for at least one group of the depositors or introduce the deposit insurance system with co-insurance.

Keywords: bank run; market discipline; banking system transparency (search for similar items in EconPapers)
JEL-codes: D82 G14 G21 (search for similar items in EconPapers)
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:nea:journl:y:2011:i:10:p:31-52

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