Intervention with Screening in Panic-Based Runs

Journal of Finance forthcoming

80 Pages Posted: 10 Mar 2018 Last revised: 12 Nov 2023

Date Written: March 26, 2023

Abstract

Policymakers frequently use guarantees to mitigate panic-based runs in the financial system. We analyze a binary-action coordination game under the global games framework and propose a novel intervention program that screens investors based on their heterogeneous beliefs about the system's stability. The program only attracts investors who are at the margin of running, and their participation boosts all investors' confidence in the financial system. Compared with government guarantee programs, our proposed program is as effective at mitigating runs but features two advantages: it costs less to implement and it is robust to moral hazard.

Keywords: Panic-based runs, screening, intervention, global games

JEL Classification: G2, D7, D8

Suggested Citation

Shen, Lin and Zou, Junyuan, Intervention with Screening in Panic-Based Runs (March 26, 2023). Journal of Finance forthcoming, Available at SSRN: https://ssrn.com/abstract=3137172 or http://dx.doi.org/10.2139/ssrn.3137172

Lin Shen (Contact Author)

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

Junyuan Zou

INSEAD ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
387
Abstract Views
1,803
Rank
138,695
PlumX Metrics