The Role of Independence in the Green-Lin Diamond-Dybvig Model

Andolfatto, David; Nosal, Ed; Wallace, Neil

doi:10.2139/ssrn.1022182

Cited by 24 publications

(26 citation statements)

References 6 publications

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“…14 One could imagine that the planner makes announcement a k to agent k before k makes his announcement. For example, the planner could tell agent k his queue position, as in Green and Lin (2003), or the set of all messages sent in the previous k − 1 planner-agent meetings, as in Andolfatto et al (2007), or "nothing", a k = ∅, as in Peck and Shell (2003). The optimal mechanism, however, will have the planner announcing nothing.…”

Section: The Best Weakly Implementable Outcomementioning

confidence: 99%

Preventing Bank Runs

Andolfatto¹,

Nosal²,

Sultanum³

2014

Self Cite

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Diamond and Dybvig (1983) is commonly understood as providing a formal rationale for the existence of bank-run equilibria. It has never been clear, however, whether bank-run equilibria in this framework are a natural byproduct of the economic environment or an artifact of suboptimal contractual arrangements. In the class of direct mechanisms, Peck and Shell (2003) demonstrate that bank-run equilibria can exist under an optimal contractual arrangement. The difficulty of preventing runs within this class of mechanism is that banks cannot identify whether withdrawals are being driven by psychology or by fundamentals. Our solution to this problem is an indirect mechanism with the following two properties. First, it provides depositors an incentive to communicate whether they believe a run is on or not. Second, the mechanism threatens a suspension of convertibility conditional on what is revealed in these communications. Together, these two properties can eliminate the prospect of bank-run equilibria in the Diamond-Dybvig environment.

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Section: The Best Weakly Implementable Outcomementioning

confidence: 99%

Preventing Bank Runs

Andolfatto¹,

Nosal²,

Sultanum³

2014

Self Cite

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“…5 Compared with some previous works, we focus more on commitment issues and less on informational frictions, although imperfect monitoring is also an important element of the model. We highlight limited commitment because banking concerns 4 Work on the Diamond-Dybvig model is a large branch of the banking literature; see Jacklin (1987), Wallace (1988Wallace ( , 1990, Peck and Shell (2003), Green and Lin (2003), Andolfatto et al (2007), and Ennis and Keister (2008). Usually, if not always, Diamond-Dybvig models do not interpret the bank as a self-interested agent, but as a contract or a mechanism, nor do they derive which agents should be bankers.…”

Section: Introductionmentioning

confidence: 99%

Banking: A Mechanism Design Approach

Mattesini¹,

Monnet²,

Wright³

2009

Working Paper (Federal Reserve Bank of Philadelphia)

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We study banking using the tools of mechanism design, without a priori assumptions about what banks are, who they are, or what they do. Given preferences, technologies, and certain frictions-including limited commitment and imperfect monitoring-we describe the set of incentive feasible allocations and interpret the outcomes in terms of institutions that resemble banks. Our bankers endogenously accept deposits, and their liabilities help others in making payments. This activity is essential: if it were ruled out the set of feasible allocations would be inferior. We discuss how many and which agents play the role of bankers. For example, we show agents who are more connected to the market are better suited for this role since they have more to lose by reneging on obligations. We discuss some banking history and compare it with the predictions of our theory. We thank many colleagues for their helpful comments and discussions. Wright thanks the NSF for research support. The views expressed in this paper are our own and do not necessarily re ‡ect those of the Federal Reserve Bank of Philadelphia or the Federal Reserve System. This paper is available free of charge at www.philadelphiafed.org/research-and-data/publications/working-papers/.

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“…In both of them, the theory and a potential monetary gain support this decision and hence should generate the same positive effect on reducing the withdrawal rates and the frequency of bank runs. 4 This is a standard assumption in the literature: see Lin (2000, 2003),Andolfatto et al (2007),Ennis and Keister (2009b).…”

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confidence: 97%

Would depositors pay to show that they do not withdraw? Theory and experiment

2020

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In a Diamond-Dybvig type model of financial intermediation, we allow depositors to announce at a positive cost to subsequent depositors that they keep their funds deposited in the bank. Theoretically, the mere availability of public announcements (and not its use) ensures that no bank run is the unique equilibrium outcome. Multiple equilibria-including bank run-exist without such public announcements. We test the theoretical results in the lab and find a widespread use of announcements, which we interpret as an attempt to coordinate on the no bank run outcome. Withdrawal rates in general are lower in information sets that contain announcements.

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The Role of Independence in the Green-Lin Diamond-Dybvig Model

Cited by 24 publications

References 6 publications

Preventing Bank Runs

Preventing Bank Runs

Banking: A Mechanism Design Approach

Would depositors pay to show that they do not withdraw? Theory and experiment

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