Do Social Networks Prevent Bank Runs?

35 Pages Posted: 31 Jan 2013

See all articles by Hubert Janos Kiss

Hubert Janos Kiss

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

Ismael Rodriguez-Lara

University of Granada - Campus La Cartuja

Alfonso Rosa-Garcia

Universidad Católica San Antonio de Murcia

Date Written: June 2012

Abstract

We report experimental evidence on the effect of observability of actions on bank runs. We model depositors' decision-making in a sequential framework, with three depositors located at the nodes of a network. Depositors observe the other depositors' actions only if connected by the network. A sufficient condition to prevent bank runs is that the second depositor to act is able to observe the first one's action (no matter what is observed). Experimentally, we find that observability of actions affects the likelihood of bank runs, but depositors' choice is highly influenced by the particular action that is being observed. This finding suggests a new source for the occurrence of bank runs. Observability of actions can provoke runs that cannot be explained neither by coordination nor by fundamental problems, the two main culprits identified by the literature.

Keywords: bank runs, social networks, coordination failures, experimental evidence

JEL Classification: C70, C91, D80, D85, G21

Suggested Citation

Kiss, Hubert Janos and Rodriguez-Lara, Ismael and Rosa-Garcia, Alfonso, Do Social Networks Prevent Bank Runs? (June 2012). Available at SSRN: https://ssrn.com/abstract=2208629 or http://dx.doi.org/10.2139/ssrn.2208629

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

Ismael Rodriguez-Lara

University of Granada - Campus La Cartuja ( email )

Campus La Cartuja
Granada
Spain

Alfonso Rosa-Garcia

Universidad Católica San Antonio de Murcia ( email )

Avenida Jerónimos, 135
Guadalupe
Murcia, 30107
Spain

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