Experimental Evidence on Bank Runs Under Partial Deposit Insurance

ESSEC WORKING PAPER 1705, 2017

27 Pages Posted: 19 Apr 2017

See all articles by Oana Peia

Oana Peia

University College Dublin (UCD)

Radu Vranceanu

ESSEC Business School; University of Cergy-Pontoise - THEMA

Date Written: April 11, 2017

Abstract

This paper presents experimental evidence on depositor behavior under partial deposit insurance schemes. In the experiment, the size of a deposit insurance fund cannot fully cover all deposits and the level of insurance depends on the number of depositors running on the bank. We show that this form of strategic uncertainty about deposit coverage exerts a significant impact on the propensity to withdraw, and results in a large frequency of bank runs. Runs are more likely when depositors have noisy information about the size of the insurance fund and as the maximum coverage increases, in line with a risk-dominant equilibrium selection mechanism. From a policy perspective, our results emphasize the limits of underfunded deposit insurance schemes in preventing systemic banking crises.

Keywords: Bank runs, Deposit insurance, Risk dominance, Global games

JEL Classification: G21, G02, C91, D83

Suggested Citation

Peia, Oana and Vranceanu, Radu, Experimental Evidence on Bank Runs Under Partial Deposit Insurance (April 11, 2017). ESSEC WORKING PAPER 1705, 2017, Available at SSRN: https://ssrn.com/abstract=2955171 or http://dx.doi.org/10.2139/ssrn.2955171

Oana Peia (Contact Author)

University College Dublin (UCD) ( email )

Belfield
Belfield, Dublin 4 4
Ireland

Radu Vranceanu

ESSEC Business School ( email )

3, Av. Bernard Hirsch
PB 50105
Cergy-Pontoise, 95021
France

HOME PAGE: http://www.essec.fr

University of Cergy-Pontoise - THEMA ( email )

33 boulevard du port
F-95011 Cergy-Pontoise Cedex, 95011
France

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
90
Abstract Views
557
rank
383,343
PlumX Metrics