Would Depositors Like to Show Others that They Do Not Withdraw? Theory and Experiment
40 Pages Posted: 26 Oct 2015
Date Written: October 26, 2015
There is an asymmetry regarding what previous decisions depositors may observe when choosing whether to withdraw or keep the money deposited: it is more likely that withdrawals are observed. We study how decision-making changes if depositors are able to make their decision to keep their funds in the bank visible to subsequent depositors at a cost. We show theoretically in a Diamond-Dybvig setup that without this signaling option multiple equilibria are possible, while signaling makes the no-run outcome the unique equilibrium. We test if the theoretical predictions hold in a lab experiment. We find that indeed when signaling is available, bank runs are less likely to arise and signaling is extensively used.
Keywords: bank runs, asymmetric information, experimental evidence, signaling
JEL Classification: C72, C91, D80, G21
Suggested Citation: Suggested Citation