Pay, Stay or Delay? How to Settle a Run

30 Pages Posted: 18 Nov 2019

See all articles by Rafael Matta

Rafael Matta

SKEMA Business School - Université Côte d'Azur

Enrico C. Perotti

University of Amsterdam - Finance Group; Centre for Economic Policy Research (CEPR); Tinbergen Institute

Date Written: October 15, 2019


We study how the trade-off between liquidity provision and value preservation shapes redemption rules for financial intermediaries. In the literature, a bank prioritizes liquidity provision in a run by selling all assets. In reality, default followed by a mandatory stay on payments is triggered once a bank runs out of liquidity, removing withdrawal queue priority and reducing run incentives. Orderly resolution avoids fire sales, but reduces liquidity provision so strict sequential service dominates when assets are highly liquid (e.g., Treasury MMFs). We show that run frequency under sequential service may be nonmonotonic in asset liquidity. For high enough asset liquidity and sufficiently small liquidity benefits, a payment stay with immediate asset sale and payout is best, rationalizing new rules on gates on Prime MMFs. Our results explain the asset allocation and investor sorting across commercial, narrow, and shadow banks.

Keywords: liquidity, bank runs, global games, money market fund, demandable debt, mandatory stay

JEL Classification: D8, G21

Suggested Citation

Matta, Rafael and Perotti, Enrico C., Pay, Stay or Delay? How to Settle a Run (October 15, 2019). Amsterdam Law School Research Paper No. 2019-33; Amsterdam Center for Law & Economics Working Paper No. 2019-04. Available at SSRN: or

Rafael Matta

SKEMA Business School - Université Côte d'Azur ( email )

60 rue Dostoïevski
Sophia Antipolis, 06902

HOME PAGE: http://

Enrico C. Perotti (Contact Author)

University of Amsterdam - Finance Group ( email )

Plantage Muidergracht 12
Amsterdam, 1018 TV
+31 20 525 4159 (Phone)
+31 20 525 5285 (Fax)


Centre for Economic Policy Research (CEPR)

United Kingdom

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS

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