Do Social Networks Prevent Bank Runs?

Hubert Janos Kiss, Ismael Rodriguez-Lara and Alfonso Rosa-García

No 812, Discussion Papers in Economic Behaviour from University of Valencia, ERI-CES

Abstract: We report experimental evidence on the effect of observability of actions on bank runs. We model depositors' decision-making in a sequential framework, with three depositors located at the nodes of a network. Depositors observe the other depositors' actions only if connected by the network. A sufficient condition to prevent bank runs is that the second depositor to act is able to observe the first one's action (no matter what is observed). Experimentally, we find that observability of actions affects the likelihood of bank runs, but depositors' choice is highly influenced by the particular action that is being observed. This finding suggests a new source for the ocurrence of bank runs. Observability of actions can provoke runs that cannot be explained neither by coordination nor by fundamental problems, the two main culprits identified by the literature.

Keywords: bank runs; social networks; coordination failures; experimental evidence (search for similar items in EconPapers)
JEL-codes: C70 C91 D80 D85 G21 (search for similar items in EconPapers)
Date: 2012-06
New Economics Papers: this item is included in nep-ban, nep-cba, nep-exp, nep-gth, nep-net and nep-soc
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Related works:
Working Paper: Do Social Networks Prevent Bank Runs? (2010)
Working Paper: Do social networks prevent bank runs? (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:dbe:wpaper:0812

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