| Haibin Zhu, Duke University |
| Optimal Bank Runs without Self-Fulfilling Prophecies |
| Session: C-9-2 Monday 14 August 2000 by Zhu, Haibin |
| This paper extends the standard Diamond-Dybvig model for a general equilibrium in which depositors make their withdrawal decisions sequentially and banks strategically choose their contracts. There is a unique Subgame Perfect Nash Equilibrium (SPNE) in the decentralized economy. Bank runs can occur when depositors perceive a low return on bank assets. When information is imperfect, bank runs can happen even when the economy is in a good state. A representative bank can earn positive profits in equilibrium due to the sequential service constraint. When there are several risky projects available, the high-risk technology may be chosen as a socially efficient solution. |
| Submitted paper full-text in .pdf |