Bank Runs and the Optimality of Limited Banking

James Peck and Abolfazi Setayesh
Additional contact information
Abolfazi Setayesh: The Ohio State University

Review of Economic Dynamics, 2023, vol. 47, 100-110

Abstract: We extend the Diamond-Dybvig model of bank runs to include a specification of how much to deposit. When the propensity to run is zero, we prove an equivalence result, that the efficient allocation (satisfying resource, IC, and sequential service constraints) can be achieved in equilibrium as long as the deposit level is above a threshold. Within this range, the lower the deposit level, the more tempted patient depositors are to withdraw early. When the propensity to run is positive and certain conditions are met, the optimal banking system entails less than full deposits and runs on the equilibrium path. We extend the analysis to consider a propensity to run that depends on the risk factor of the run equilibrium. (Copyright: Elsevier)

Keywords: Bank runs; Partial deposits; Fragility (search for similar items in EconPapers)
JEL-codes: D82 E02 G01 G21 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://dx.doi.org/10.1016/j.red.2022.01.003
Access to full texts is restricted to ScienceDirect subscribers and institutional members. See https://www.sciencedirect.com/ for details.

Related works:
Working Paper: Online Appendix to "Bank Runs and the Optimality of Limited Banking" (2022)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:red:issued:21-90

Ordering information: This journal article can be ordered from
https://www.economic ... ription-information/

DOI: 10.1016/j.red.2022.01.003

Access Statistics for this article

Review of Economic Dynamics is currently edited by Loukas Karabarbounis

More articles in Review of Economic Dynamics from Elsevier for the Society for Economic Dynamics Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().