Equilibrium Bank Runs
James Peck and
Karl Shell
Journal of Political Economy, 2003, vol. 111, issue 1, 103-123
Abstract:
We analyze a banking system in which the class of feasible deposit contracts, or mechanisms, is broad. The mechanisms must satisfy a sequential service constraint, but partial or full suspension of convertibility is allowed. Consumers must be willing to deposit, ex ante. We show, by examples, that under the so-called "optimal contract," the postdeposit game can have a run equilibrium. Given a propensity to run, triggered by sunspots, the optimal contract for the full predeposit game can be consistent with runs that occur with positive probability. Thus the Diamond-Dybvig framework can explain bank runs as emerging in equilibrium under the optimal deposit contract.
Date: 2003
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Persistent link: https://EconPapers.repec.org/RePEc:ucp:jpolec:v:111:y:2003:i:1:p:103-123
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