Asymmetric Information and Bank Runs

Chao Gu

No 1005, Working Papers from Department of Economics, University of Missouri

Abstract: In the existing literature, panic-based bank runs are triggered by a commonly acknowledged and observed sunspot signal. There are only two equilibrium realizations resulting from the commonly observed sunspot signal: Everyone runs or no one runs. I consider a more general and more realistic situation in which consumers observe noisy private sunspot signals. If the noise in the signals is sufficiently small, there exists a proper correlated equilibrium for some demand deposit contracts. A full bank run, a partial bank run (in which some consumers panic whereas others do not), or no bank run occurs, depending on the realization of the sunspot signals. If the probabilities of runs are small, the optimal demand deposit contract tolerates full and partial bank runs.

Keywords: sunspot equilibrium; correlated equilibrium; imperfect coordination; imperfect information. (search for similar items in EconPapers)
JEL-codes: D82 G21 (search for similar items in EconPapers)
Pages: 41 pgs.
Date: 2010-02-11
New Economics Papers: this item is included in nep-ban, nep-cta and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published as Noisy Sunspots and Bank Runs in Macroeconomic Dynamics 2011

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Related works:
Working Paper: Asymmetric Information and Bank Runs (2007)
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