Contagious Bank Runs: Experimental Evidence

30 Pages Posted: 4 Jan 2013 Last revised: 26 Jul 2013

See all articles by Martin Brown

Martin Brown

University of St. Gallen

Stefan Trautmann

Tilburg University

Razvan Vlahu

De Nederlandsche Bank; De Nederlandsche Bank

Date Written: December 20, 2012

Abstract

We conduct a laboratory experiment to examine under which circumstances a depositor-run at one bank may lead to a depositor-run at another bank. We implement two-person coordination games which capture the essence of the Diamond-Dybvig (1983) bank-run model. Subjects in the roles of followers observe the deposit withdrawal decisions of leaders before they make their own deposit withdrawal decisions. In one treatment followers know that there are no economic linkages between the leaders’ and the followers’ banks. In a second treatment followers know that there are economic linkages between the leaders’ and the followers’ banks. Our results suggest that deposit withdrawals are strongly contagious across banks only when depositors know that there are economic linkages between banks. The contagion of withdrawals is by a change in beliefs about bank asset quality and in beliefs about the behavior of other depositors, with the latter channel being more pronounced. Our results reconcile panic-based and information-based explanations of bank runs.

Keywords: contagion, bank runs, systemic risk

JEL Classification: D81, G21, G28

Suggested Citation

Brown, Martin and Trautmann, Stefan and Vlahu, Razvan, Contagious Bank Runs: Experimental Evidence (December 20, 2012). De Nederlandsche Bank Working Paper No. 363; University of St.Gallen, School of Finance Research Paper No. 2012/7. Available at SSRN: https://ssrn.com/abstract=2195903 or http://dx.doi.org/10.2139/ssrn.2195903

Martin Brown (Contact Author)

University of St. Gallen ( email )

Unterer Graben 21
St. Gallen, CH-9000
Switzerland

Stefan Trautmann

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC 5000 LE
Netherlands

Razvan Vlahu

De Nederlandsche Bank ( email )

P.O. Box 98
Amsterdam, 1000 AB
Netherlands
+31205242483 (Phone)
+31205242506 (Fax)

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Register to save articles to
your library

Register

Paper statistics

Downloads
134
Abstract Views
1,016
rank
213,090
PlumX Metrics