Financial Literacy and Bank Runs: An Experimental Analysis

2011

Multiple equilibria in models of bank runs imply that coordination of play is a challenging task. In particular, for first-play type of situation, successful coordination appears a very strong assumption. We develop a simple representation where depositors tentatively select actions profiles that need not be consistent but can perform research in order to learn about others ’ intentions. We show that changes in fundamentals influence the value of learning about others ’ intentions in a way that can facilitate multiplier effects. This effect can be further amplified by the strategic complementarities in research activities. We identify cases in which the equilibrium is unique. En general, due to strategic complementarities, multiplicity cannot be ruled out. We explore the predictions associated to a form of procedurally rational behavior. 1.

2011

We analyze a banking system in which the class of feasible deposit contracts, or mechanisms, is broad. The mechanisms must satisfy a sequential service constraint, but partial or full suspension of convertibility is allowed. Consumers must be willing to deposit, ex ante. We show, by examples, that under the socalled "optimal contract," the post-deposit game can have a run equilibrium.

Experimental Economics, 2020

In a Diamond-Dybvig type model of financial intermediation, we allow depositors to announce at a positive cost to subsequent depositors that they keep their funds deposited in the bank. Theoretically, the mere availability of public announcements (and not its use) ensures that no bank run is the unique equilibrium outcome. Multiple equilibria-including bank run-exist without such public announcements. We test the theoretical results in the lab and find a widespread use of announcements, which we interpret as an attempt to coordinate on the no bank run outcome. Withdrawal rates in general are lower in information sets that contain announcements.

European Economic Review, 2021

We study, using laboratory experiments, the extent to which disclosure policies about the financial health of a bank affect the likelihood of a bank run. We consider two disclosure regimes, full disclosure and no disclosure, under two scenarios: one in which the bank is on average financially solvent and another in which the bank is on average insolvent. When the bank is on average insolvent, the full disclosure regime reduces the expected likelihood of runs. In contrast, when the bank is on average solvent, the full disclosure regime increases the expected likelihood of runs. Our evidence illustrates the importance of contemporary financial disclosure regulations.

Economica, 2013

Se estudia un modelo de corrida bancaria en el que los depositantes no llegaron a un consenso sobre la acción a elegir pero pueden informarse acerca de las intenciones de los otros jugadores. La propiedad de equilibrio indeterminado reaparece en el juego con adquisición de información. En el escenario bajo análisis, el equilibrio con niveles positivos de adquisición de información resulta en mayores probabilidades de quiebra del banco. La correlación en las señales aumenta el espacio de parámetros para el cual existen equilibrios con niveles positivos de adquisición de información y mayor probabilidad de quiebra del banco. Clasificación JEL: C72, G21.

SSRN Electronic Journal, 2017

This paper presents experimental evidence on depositor behavior under partial deposit insurance schemes. In the experiment, the size of a deposit insurance fund cannot fully cover all deposits and the level of insurance depends on the number of depositors running on the bank. We show that this form of strategic uncertainty about deposit coverage exerts a significant impact on the propensity to withdraw, and results in a large frequency of bank runs. Runs are more likely when depositors have noisy information about the size of the insurance fund and as the maximum coverage increases, in line with a risk-dominant equilibrium selection mechanism. From a policy perspective, our results emphasize the limits of underfunded deposit insurance schemes in preventing systemic banking crises.

Journal of Banking & Finance, 2019

This paper studies depositor behavior in a bank run experiment with partial deposit insurance. In the experiment, depositors face two forms of uncertainty regarding their deposit coverage in the event of a bank run: (i) "intrinsic" uncertainty related to the size of the deposit insurance fund, and (ii) "strategic" uncertainty, as the actual coverage depends on the number of depositors who run on the bank. We consider three scenarios that differ in the way the deposit insurance scheme reimburses depositors. The results show that intrinsic uncertainty on its own has a negligible effect on the number of bank runs. However, when combined, the two forms of uncertainty exert a significant impact on the propensity to withdraw and result in a large number of bank runs. Moreover, runs are more frequent when leaving funds in the bank is an increasingly costly strategy.

SSRN Electronic Journal, 2000

Macroeconomic Dynamics

We analyze in some detail the full predeposit game in a simple, tractable, yet very rich, banking environment. How does run-risk affect the optimal deposit contract? If there is a run equilibrium in the postdeposit game, then the optimal contract in the predeposit game tolerates small-probability runs. However, this does not mean that small changes in run-risk are ignored. In some cases, the optimal contract becomes—as one would expect—strictly more conservative as the run-probability increases (until it switches to the best run-proof contract), and the equilibrium allocation is not a mere randomization over the equilibrium allocations from the postdeposit game. In other cases, the allocation is a mere randomization over the equilibria from the postdeposit game. In the first cases (the more intuitive cases), the incentive constraint does not bind. In the second cases, the incentive constraint does bind.