Financial Literacy and Bank Runs: An Experimental Analysis

Abstract

We set up an experimental coordination game among bank depositors à la Diamond and Dybvig (1983). We elicit subjects’ financial literacy and study the impact of revealing this information on the coordination problem typical of this game with multiple equilibria. We find that when no information is revealed the likelihood of runs increases with bank size, while when information on financial literacy is disclosed it increases in small banks and decreases in large ones. Over all banks’ dimensions, the probability of coordinating on the inefficient equilibrium is lower when the average financial literacy revealed to the group is higher.

Keywords: Bank Run, Laboratory Experiment, Financial Literacy, Coordination Game

JEL Classification: C92, C72, D80, G21