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
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://cae.economics.cornell.edu/07-14.pdf

Related works:
Working Paper: Asymmetric Information and Bank Runs (2010)
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:ecl:corcae:07-14

Access Statistics for this paper

More papers in Working Papers from Cornell University, Center for Analytic Economics Contact information at EDIRC.
Bibliographic data for series maintained by ().