On the Effects of Deposit Insurance and Observability on Bank Runs: An Experimental Study

19 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: February 1, 2011

Abstract

We study the effects of deposit insurance and observability of previous actions on the emergence of bank runs by means of a controlled laboratory experiment. We consider three depositors in the line of a common bank. Depositors decide in sequence between withdrawing or keeping their money deposited. We have three different treatments in which depositors who keep the money have full insurance, are partially insured, or not insured at all in case of a bank run. We find that different levels of deposit insurance and the possibility of observing other depositor's ’actions reduce the likelihood of bank runs. The effect of these variables is not independent. Our data suggest that optimal deposit insurance should take into account the degree of observability: full and partial insurance are equally effective when decisions are observable, whereas full insurance is more likely to prevent bank runs when depositors do not observe other depositors' ’decisions.

Keywords: deposit insurance, observability, bank runs, experimental economics

JEL Classification: G21, C90

Suggested Citation

Kiss, Hubert Janos and Rodriguez-Lara, Ismael and Rosa-Garcia, Alfonso, On the Effects of Deposit Insurance and Observability on Bank Runs: An Experimental Study (February 1, 2011). Journal of Money, Credit, and Banking, Vol. 44, Issue 8, 2012. Available at SSRN: https://ssrn.com/abstract=2208708 or http://dx.doi.org/10.2139/ssrn.2208708

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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