11 Pages Posted: 30 Nov 2004
Date Written: November 2004
This paper reconciles the two explanations of a financial crisis, the self-fulfilling prophecy and the fundamental causes, in an empirically-relevant framework, by explicitly modeling the costly voluntary acquisition of information about fundamentals in a variant of Diamond and Dybvig (1983). In the run equilibrium, investors engage in costly evaluation of projects, so that banks with lower-return projects fail. In the no-run equilibrium, there is no project evaluation. Investors' coordination on a specific equilibrium is triggered by a self-fulfilling prophecy. So, financial crises are seen as both, fundamentals-based and self-fulfilling prophecies-based phenomena.
Keywords: Financial crisis, banks, self-fulfilling prophecy
JEL Classification: F34, G21, G31
Suggested Citation: Suggested Citation
Nikitin, Maxim, Information Acquisition, Coordination, and Fundamentals in a Financial Crisis (November 2004). Available at SSRN: https://ssrn.com/abstract=624341 or http://dx.doi.org/10.2139/ssrn.624341