Experimental Evidence on Bank Runs Under Partial Deposit Insurance
ESSEC WORKING PAPER 1705, 2017
27 Pages Posted: 19 Apr 2017
Date Written: April 11, 2017
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: Suggested Citation