Run Equilibria in a Model of Financial Intermediation

48 Pages Posted: 23 Jan 2008

See all articles by Huberto M. Ennis

Huberto M. Ennis

Federal Reserve Banks - Federal Reserve Bank of Richmond

Todd Keister

Rutgers, The State University of New Jersey - Department of Economics

Date Written: January 1, 2008

Abstract

We study the Green and Lin (2003) model of financial intermediation with two new features: traders may face a cost of contacting the intermediary, and consumption needs may be correlated across traders. We show that each feature is capable of generating an equilibrium in which some (but not all) traders "run" on the intermediary by withdrawing their funds at the first opportunity regardless of their true consumption needs. Our results also provide some insight into elements of the economic environment that are necessary for a run equilibrium to exist in general models of financial intermediation. In particular, our findings highlight the importance of information frictions that cause the intermediary and traders to have different beliefs, in equilibrium, about the consumption needs of traders who have yet to contact the intermediary.

Keywords: bank runs, optimal contracts, private information, incentive feasibility, self-fulfilling expectations

JEL Classification: D82, D84, G21

Suggested Citation

Ennis, Huberto M. and Keister, Todd, Run Equilibria in a Model of Financial Intermediation (January 1, 2008). FRB of New York Staff Report No. 312. Available at SSRN: https://ssrn.com/abstract=1086357 or http://dx.doi.org/10.2139/ssrn.1086357

Huberto M. Ennis

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Todd Keister (Contact Author)

Rutgers, The State University of New Jersey - Department of Economics ( email )

75 Hamilton Street
New Brunswick, NJ 08901
United States

HOME PAGE: http://econweb.rutgers.edu/tkeister

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