Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/70434
Authors: 
Gu, Chao
Year of Publication: 
2007
Series/Report no.: 
CAE Working Paper 07-14
Abstract: 
It is known that sunspots can trigger panic-based bank runs and that the optimal banking contract can tolerate panic-based runs. The existing literature assumes that these sunspots are based on a publicly observed extrinsic randomizing device. In this paper, I extend the analysis of panic-based runs to include an asymmetric-information, extrinsic randomizing device. Depositors observe different, but correlated, signals on the stability of the bank. I find that if the signals that depositors obtain are highly correlated, there exists a correlated equilibrium for some demand deposit contracts. In this equilibrium, either a full bank run, or a partial bank run, or non bank run occurs depending on the realization of the signals. Computed examples indicate that in some economies, a demand-deposit contract that tolerates bank runs and partial bank runs is optimal; while in some other economies a run-proof contract is optimal.
Subjects: 
bank runs
randomizing device
sunspot equilibrium
correlated equilibrium
imperfect information
JEL: 
D82
G21
P11
Document Type: 
Working Paper

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