A Diamond-Dybvig Model Without Bank Run: The Power of Signaling

17 Pages Posted: 22 Nov 2010 Last revised: 15 Dec 2010

See all articles by Hubert Janos Kiss

Hubert Janos Kiss

Eötvös Loránd University; Hungarian Academy of Sciences (HAS) - Institute of Economics CERS-HAS (IEHAS)

Date Written: November 21, 2010

Abstract

This paper introduces the possibility of signaling into a finite-depositor version of the Diamond-Dybvig model. More precisely, the decision to keep the funds in the bank is assumed to be unobservable, but depositors are allowed to make it observable by signaling, at a cost. Depositors decide consecutively whether to withdraw their funds or continue holding balances in the bank, and they choose if they want to signal the latter decision. If the cost of signaling is moderate, then bank runs do not occur. Moreover, no signals are made, so the unconstrained-efficient allocation is implemented without any costs.

Keywords: bank run, sequential game, signaling, iterated deletion of strictly dominated strategies, coordination

JEL Classification: C72, D82, G21

Suggested Citation

Kiss, Hubert Janos, A Diamond-Dybvig Model Without Bank Run: The Power of Signaling (November 21, 2010). Available at SSRN: https://ssrn.com/abstract=1712873 or http://dx.doi.org/10.2139/ssrn.1712873

Hubert Janos Kiss (Contact Author)

Eötvös Loránd University ( email )

Pazmany Peter setany 1A
Budapest, -- H1117
Hungary

Hungarian Academy of Sciences (HAS) - Institute of Economics CERS-HAS (IEHAS) ( email )

Budaorsi ut 45
Budapest, 1112
Hungary

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