An experiment on the causes of bank run contagions
Fonseca, Miguel A.
Kaplan, Todd R.
European Economic Review
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.
NOTICE: this is the author’s version of a work that was accepted for publication in European Economic Review. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in European Economic Review, vol. 72, pp. 39-51. DOI 10.1016/j.euroecorev.2014.09.003
This version originally published in University of Exeter Economics Department Discussion Paper Series, Paper No. 12/06
Vol. 72, pp. 39 - 51