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Do Social Networks Prevent Bank Runs?

Alfonso Garcia-Rosa, Hubert Janos Kiss and Ismael Rodriguez-Lara
Authors registered in the RePEc Author Service: Alfonso Rosa-García ()

UMUFAE Economics Working Papers from DIGITUM. Universidad de Murcia

Abstract: We develop, both theoretically and experimentally, a stereotypical environment that allows for co-ordination breakdown, leading to a bank run. Three depositors are located at the nodes of a network and have to decide whether to keep their funds deposited or to withdraw. One of the depositors has immediate liquidity needs, whereas the other two depositors do not. Depositors act sequentially and observe others’ actions only if connected by the network. Theoretically, a link connecting the first two depositors to decide is sufficient to avoid a bank run. However, our experimental evidence shows that subjects’choice is not a¤ected by the existence of the link per se. Instead, being observed and the particular action that is observed determine subjects’choice. Our results highlight the importance of initial decisions in the emergence of a bank run. In particular, Bayesian analysis reveals that subjects clearly depart from predicted behavior when observing a withdrawal.

Keywords: bank runs; coordination failure; experimental evidence; networks (search for similar items in EconPapers)
JEL-codes: D12 R23 (search for similar items in EconPapers)
Pages: 20
Date: 2010-01
New Economics Papers: this item is included in nep-exp, nep-mic, nep-net and nep-soc
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed

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Related works:
Working Paper: Do Social Networks Prevent Bank Runs? (2012) Downloads
Working Paper: Do social networks prevent bank runs? (2009) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:mur:wpaper:9723

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