Do Social Networks Prevent Bank Runs?
35 Pages Posted: 31 Jan 2013
Date Written: June 2012
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: Suggested Citation