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Asymmetric Information and Bank Runs

Chao Gu

Working Papers from Cornell University, Center for Analytic Economics

Abstract: It is known that sunspots can trigger panic-based bank runs and that the optimal banking contract can tolerate panic-based runs. The existing literature assumes that these sunspots are based on a publicly observed extrinsic randomizing device. In this paper, I extend the analysis of panic-based runs to include an asymmetric-information, extrinsic randomizing device. Depositors observe different, but correlated, signals on the stability of the bank. I find that if the signals that depositors obtain are highly correlated, there exists a correlated equilibrium for some demand deposit contracts. In this equilibrium, either a full bank run, or a partial bank run, or non bank run occurs depending on the realization of the signals. Computed examples indicate that in some economies, a demand-deposit contract that tolerates bank runs and partial bank runs is optimal; while in some other economies a run-proof contract is optimal.

JEL-codes: D82 G21 P11 (search for similar items in EconPapers)
Date: 2007-10
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https://cae.economics.cornell.edu/07-14.pdf

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Working Paper: Asymmetric Information and Bank Runs (2010) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:corcae:07-14

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