Information acquisition,coordination, and fundamentals in a financial crisis |
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Authors: | Maxim Nikitin R Todd Smith |
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Institution: | 1. International College of Economics and Finance, SU-HSE, Moscow, Russia;2. University of Alberta, Department of Economics, Edmonton, AB, Canada T6G 2H4 |
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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 Diamond, D., Dybvig, P., 1983. Bank runs, deposit insurance, and liquidity. Journal of Political Economy 91, 401–419]. The model exhibits strategic complementarity in information acquisition. In the “partial run” equilibrium investors engage in costly evaluation of projects, so that banks with lower-return projects fail. There also exist the classic “full-run” and “no-run” equilibria in which 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. |
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Keywords: | F34 G21 |
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