Would depositors pay to show that they do not withdraw? Theory and experiment

Abstract

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.

Preventing (panic) bank runs

“…Experimental evidence also shows that deposit insurance diminishes the incidence of bank runs, albeit it does not eliminate them completely (Schotter and Yorulmazer, 2009;Kiss et al, 2012;Peia and Vranceanu, 2019). 1 Our study is also related to Kinateder et al (2020), who assume that only withdrawals are observed as a default, but depositors can make visible to subsequent depositors the decision to keep their funds deposited (at a modest cost). In this environment, the iterated elimination of dominated strategies implies that the mere possibility of the costly announcement should be enough to eliminate bank runs.…”

“…24 This finding is in line with previous evidence on bank runs. For example, Kinateder et al (2020) test experimentally a different mechanism to prevent bank runs, also based on the principle of iterated elimination of dominated strategies. They also find that participants frequently use the action introduced to dominate withdrawal instead of opting to keep the money in the bank.…”

“…In order to assess whether the priority account affects the emergence of bank runs, we first need to determine whether or not panic bank runs emerge in our data. As a first step, we would like to replicate the findings in Kiss et al (2014aKiss et al ( , 2018 and Kinateder et al (2020) that the observability of actions influences withdrawal rates (see also Kiss et al (2014bKiss et al ( , 2016, Garratt and Keister (2009), Shakina and Angerer (2018) and Davis and Reilly (2016) for similar experimental findings).…”