Transparency and Bank runs

Cecilia Parlatore

No 1251, 2014 Meeting Papers from Society for Economic Dynamics

Abstract: I analyze how the precision of information about the value of a bank's assets affects welfare and the economy's proneness to bank runs. In a model of banking with imperfect information, I find that more precise information need not be better: it may make an economy more fragile in the sense that bank runs are more likely to occur, and it may decrease welfare. When the transparency level is low, late consumers cannot distinguish bad states from good states based on their signal, and they have no incentives to withdraw early. As the transparency level increases, signals become more informative and incentives to withdraw early become stronger, increasing fragility and decreasing welfare.

Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed014:1251

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