On the Existence of Equilibrium Bank Runs in a Diamond-Dybvig Environment

Guilherme Carmona

Finance from University Library of Munich, Germany

Abstract: In a version of the Diamond and Dybvig (1983) model with aggregate uncertainty, we show that there exists an equilibrium with the following properties: all consumers deposit at the bank, all patient consumers wait for the last period to withdraw, and the bank fails with strictly positive probability. Furthermore, we show that the probability of a bank failure remains bounded away from zero as the number of consumers increases. We interpret such an equilibrium as reflecting a bank run, defined as an episode in which a large number of people withdraw their deposits from a bank, forcing it to fail. Our results show that we can have equilibrium bank runs with consumers poorly informed about the true state of nature, a sequential service constraint, an infinite marginal utility of consumption at zero, and without consumers' panic and sunspots. We therefore think that aggregate risk in Diamond-Dybvig-like environments can be an important element to explain bank runs.

Keywords: Bank runs; aggregate uncertainty (search for similar items in EconPapers)
JEL-codes: C72 G21 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2004-04-20
New Economics Papers: this item is included in nep-dge
Note: Type of Document - pdf; pages: 52
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: On the existence of equilibrium bank runs in a Diamond-Dybvig environment (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpfi:0404009

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