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On the effects of deposit insurance and observability on bank runs: an experimental study

Alfonso Rosa García, Hubert Janos Kiss and Ismael Rodríguez Lara
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Alfonso Rosa García: Universidad de Murcia
Ismael Rodríguez Lara: Universidad de Alicante

Authors registered in the RePEc Author Service: Ismael Rodriguez-Lara and Alfonso Rosa-García ()

Working Papers. Serie AD from Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie)

Abstract: We study the effects of deposit insurance and observability of previous actions on the emergence of bank runs by means of a controlled laboratory experiment. We consider three depositors in the line of a bank, who decide between withdrawing or keeping their money deposited. We have three treatments with different levels of deposit insurance which reflect the losses a depositor may incur in the case of a bank run. We find that different levels of deposit insurance and the possibility of observing other depositors’ actions affect the likelihood of bank runs. When decisions are not observable, higher levels of deposit insurance decrease the probability of bank runs. When decisions are observable, this is not the case. These results suggest that (i) observability might be considered as a partial substitute of deposit insurance, and that (ii) the optimal deposit insurance should take into account the degree of observability.

Keywords: deposit insurance; observability; bank runs; experimental economics (search for similar items in EconPapers)
JEL-codes: G21 C90 (search for similar items in EconPapers)
Pages: 1 pages
Date: 2011-02
New Economics Papers: this item is included in nep-exp and nep-ias
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Related works:
Journal Article: On the Effects of Deposit Insurance and Observability on Bank Runs: An Experimental Study (2012) Downloads
Journal Article: On the Effects of Deposit Insurance and Observability on Bank Runs: An Experimental Study (2012) Downloads
Working Paper: On the Effects of Deposit Insurance and Observability on Bank Runs: An Experimental Study (2011) Downloads
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