Governance by Depositors, Bank Runs and Ambiguity Aversion: A Theoretical Approach

Abstract

We investigate the theoretical relationship between ambiguity aversion and the decision to withdraw early from a deposit contract. We first document and define the concepts to illustrate our results. Then we extend the theoretical framework of Gorton (1985) to implement a model of maxmin expected utility to match the ambiguity aversion hypothesis. We observe that the most ambiguous depositors are more likely to mistakenly withdraw their deposits, reducing bank stability and leading to inefficient bank runs. We also show higher ambiguity levels negatively impact bank equity levels.

Keywords: Banking governance, ambiguity aversion, depositor's behaviour, bank runs

JEL Classification: G02, G18