Bank Runs as Coordination Failures: An Experimental Study

Posted: 16 Feb 2013 Last revised: 23 Aug 2014

See all articles by Rod Garratt

Rod Garratt

University of California, Santa Barbara (UCSB) - Department of Economics

Todd Keister

Rutgers, The State University of New Jersey - Department of Economics

Date Written: March 13, 2009

Abstract

We use experimental methods to investigate what factors contribute to breakdowns in coordination among a bank’s depositors. Subjects in our experiment decide whether to leave their money deposited in a bank or withdraw it early; a bank run occurs when there are too many early withdrawals. We explore the effects of adding uncertainty about fundamental withdrawal demand and of changing the number of opportunities subjects have to withdraw. Our results show that (i) bank runs are rare when fundamental withdrawal demand is known but occur frequently when it is stochastic, and (ii) subjects are more likely to withdraw when given multiple opportunities to do so than when presented with a single decision. For the multiple-opportunity case, we evaluate individual withdrawal decisions according to a set of simple cutoff rules.We find that the cutoff rule corresponding to the payoff-dominant equilibrium of the game, which involves Bayesian updating of probabilities, explains subject behavior better than other rules.

Keywords: experimental coordination games, banking panics, Bayesian updating, demand deposits

JEL Classification: C92, G21, C72

Suggested Citation

Garratt, Rod and Keister, Todd, Bank Runs as Coordination Failures: An Experimental Study (March 13, 2009). Journal of Economic Behavior and Organization, Vol. 71, No. 2, 2009. Available at SSRN: https://ssrn.com/abstract=2218547

Rod Garratt

University of California, Santa Barbara (UCSB) - Department of Economics ( email )

2127 North Hall
Santa Barbara, CA 93106
United States

Todd Keister (Contact Author)

Rutgers, The State University of New Jersey - Department of Economics ( email )

75 Hamilton Street
New Brunswick, NJ 08901
United States

HOME PAGE: http://econweb.rutgers.edu/tkeister

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