Equilibrium Bank Runs

James Peck and Karl Shell ()

Working Papers from Cornell University, Center for Analytic Economics

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 post-deposit game can have a run equilibrium. Given a "propensity" to run, triggered by sunspots, the optimal contract for the full pre-deposit 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.

JEL-codes: D82 E42 G21 (search for similar items in EconPapers)
Date: 2001-06
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Citations: View citations in EconPapers (22)

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Journal Article: Equilibrium Bank Runs (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:corcae:01-10r

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