Once relegated to cinema or history lectures, bank runs have become a modern phenomenon that captures the interest of students. In this article, the authors explain a simple classroom experiment based on the Diamond-Dybvig model (1983) to demonstrate how a bank runa seemingly irrational eventcan occur rationally. They then present possible topics for discussion including various ways to prevent bank runs and moral hazard.
Bibliographical noteFunding Information:
The authors thank Paul Grimes and two referees for suggestions that improved this manuscript and Sharon Nemeth for proofreading. This article is part of a project for which the authors received financial support from HEFCE and help and encouragement from many colleagues at the University of Exeter, particularly Marjorie Anne Howe, Gareth Myles, and Alison Wride. The authors are also grateful for the close mentoring from the Economics Network, especially by Inna Pomerina and John Sloman, and acknowledge the abundance of patience and feedback from the numerous students who have participated in this experiment and related lectures. The design of this teaching experiment was shaped by examples set forth by many of their colleagues including Jim Cox, Steven Gjerstad, Denise Hazlett, Ariel Rubinstein, Bradley Ruffle, and especially Charles Holt.
- bank runs
- classroom experiments
- multiple equilibria
ASJC Scopus subject areas
- Economics and Econometrics