An experiment on the causes of bank run contagions

Surajeet Chakravarty; Miguel A. Fonseca; Todd R. Kaplan

doi:10.1016/j.euroecorev.2014.09.003

An experiment on the causes of bank run contagions

Surajeet Chakravarty, Miguel A. Fonseca, Todd R. Kaplan

Department of Economics

Research output: Contribution to journal › Article › peer-review

Abstract

To understand the mechanisms behind bank run contagions, we conduct bank run experiments in a modified Diamond-Dybvig setup with two banks (Left and Right). The banks' liquidity levels are either linked or independent. Left Bank depositors see their bank's liquidity level before deciding. Right Bank depositors only see Left Bank withdrawals before deciding. We find that Left Bank depositors' actions significantly affect Right Bank depositors' behavior, even when liquidities are independent. Furthermore, a panic may be a one-way street: an increase in Left Bank withdrawals can cause a panic run on the Right Bank, but a decrease does not calm depositors.

Original language	English
Pages (from-to)	39-51
Number of pages	13
Journal	European Economic Review
Volume	72
DOIs	https://doi.org/10.1016/j.euroecorev.2014.09.003
State	Published - 1 Nov 2014

Bibliographical note

Funding Information:
We are very grateful to Tim Miller for his outstanding help in programming the software and running the sessions. Financial support from the University of Exeter Business School is also gratefully acknowledged. We also thank Mardi Dungey, Dan Friedman, Ro׳i Zultan, seminar participants at Bar Ilan University, Ben-Gurion University, Copenhagen Business School, University of Düsseldorf, Hebrew University, University of Exeter, University of Guelph, University of Haifa, Queen Mary University of London, University of Queensland, the University of Tasmania, the 2012 ESA International Meeting at NYU, 2012 ESA American Meeting at U. Arizona, the 2014 RES Conference, as well as two anonymous referees and an Associate Editor for helpful comments and discussions. All remaining errors are ours alone.

Publisher Copyright:
© 2014 Elsevier B.V.

Keywords

Bank runs
Contagion
Experiments
Multiple equilibria

ASJC Scopus subject areas

Finance
Economics and Econometrics

Access to Document

10.1016/j.euroecorev.2014.09.003

Cite this

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An experiment on the causes of bank run contagions

Abstract

Bibliographical note

Keywords

ASJC Scopus subject areas

Access to Document

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