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ABSTRACT:
We use experimental methods to investigate the extent to which breakdowns in coordination can lead to bank runs. Subjects decide whether to leave money deposited in a bank or withdraw it early; a run occurs when there are too many early withdrawals. We explore the effects of randomly forcing some subjects to withdraw early and varying the number of opportunities subjects have to withdraw. Bank runs occur frequently with forced withdrawals, even if these withdrawals are unlikely to cause the bank to fail. Exposure to bank runs has a much larger effect on future withdrawal behavior when there are multiple withdrawal opportunities than with a single opportunity. We also evaluate individual withdrawal decisions according to simple cutoff rules. We find that the cutoff rule corresponding to the payoff-dominant equilibrium of the game, which involves Bayesian updating of probabilities, explains subject behavior better than other rules.

SUGGESTED CITATION:
Rod Garratt, "Bank Runs: An Experimental Study" (August 3, 2005). Department of Economics, UCSB. Departmental Working Papers. Paper wp3-05.
http://repositories.cdlib.org/ucsbecon/dwp/wp3-05