Working Papers Series
Papers below are in pdf.
Chao Gu
WP 07-21
Asymmetric Information and Bank Runs
Chao Gu
It is known that sunspots can trigger panic-based bank runs and that the optimal banking contract can tolerate panic-based runs. The existing literature assumes that these sunspots are based on a publicly observed, extrinsic randomizing device. In this paper, I extend the analysis of panic-based runs to include an asymmetric-information, extrinsic randomizing device. Depositors observe different, but correlated, signals on the stability of the bank. I find that if the signals that depositors obtain are highly correlated, there exists a correlated equilibrium for some demand deposit contracts. In this equilibrium, a full bank run, a partial bank run, or non-bank run occurs depending on the realization of the signals. Computed examples indicate that in some economies, a demand-deposit contract that tolerates bank runs and partial bank runs is optimal, whereas in some other economies a run-proof contract is optimal.
JEL Codes: D82, G21, P11
Keywords: Bank runs, randomizing device, sunspot equilibrium, correlated equilibrium, imperfect information.
WP 07-16
Herding and Bank Runs
Chao Gu
Traditional models of bank runs do not allow for herding effects, because in these models withdrawal decisions are assumed to be made simultaneously. I extend the banking model to allow a depositor to choose his withdrawal time. When he withdraws depends on his liquidity type (patient or impatient), his private, noisy signal about the quality of the bank's portfolio, and the withdrawal histories of the other depositors. In some cases, the optimal banking contract permits herding runs. Some of these "runs" are efficient in that the bank is liquidated before the portfolio worsens. Others are not efficient; these are cases in which the herd is misled.
JEL Codes: C73, D82, E59, G21
Keywords: Bank runs, herding, imperfect information, perfect Bayesian equilibrium, optimal bank contract, sequential-move game, fundamental-based bank runs.