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Only Paul Could Go To Changchun

Would depositors like to show others that they do not withdraw? Theory and Experiment

1/19/2016

 
Here.

We study how decision-making changes if depositors are able to make their decision to keep their funds in the bank visible to subsequent depositors at a cost. We show theoretically in a Diamond-Dybvig setup that without this signaling option multiple equilibria are possible, while signaling makes the no-run outcome the unique equilibrium. We test if the theoretical predicitions hold in a lab experiment. We find that indeed when signaling is available, bank runs are less likely to arise and signaling is extensively used. 

From:

Markus Kinateder
Universidad de Navarra

Hubert Janos Kiss
Hungarian Academy of Sciences

Agnes Pinter
Universidad Autónoma de Madrid



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