Information Acquisition, Coordination, and Fundamentals in a Financial Crisis

11 Pages Posted: 30 Nov 2004  

Maxim Nikitin

Higher School of Economics

Date Written: November 2004

Abstract

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

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

Maxim Nikitin (Contact Author)

Higher School of Economics ( email )

ICEF
Pokrovskiy bulvar 11
Moscow, 109028
Russia

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