Enriching information to prevent bank runs

Ricardo Cavalcanti and Paulo Monteiro

No 721, FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) from EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil)

Abstract: Sequential service in the banking sector, as modeled by Diamond and Dybvig (1983), is a barrier to full insurance and potential source of financial fragility against which deposit insurance is infeasible (Wallace, 1988). In this paper, we pursue a different perspective, viewing the sequence of contacts as opportunities to extract information through a larger message space with commitment to richer promises. As we show, if preferences satisfy a separating property then the desired elimination of dominated strategies (Green and Lin, 2003) occurs even when shocks are correlated. In this manner the sequential service promotes stability.

Date: 2011-07-27
New Economics Papers: this item is included in nep-ban
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Citations: View citations in EconPapers (11)

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Journal Article: Enriching information to prevent bank runs (2016)
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