A bank runs model with a continuum of types |
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Authors: | Yaron Azrieli James Peck |
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Institution: | Department of Economics, The Ohio State University, 1945 North High street, Columbus, OH 43210, United States |
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Abstract: | We consider a bank runs model à la Diamond and Dybvig (1983) 3] with a continuum of agent types, indexed by the degree of patience. Much of our understanding based on the two-type model must be modified. The endogenous determination of a cutoff type is central to the analysis. In the case where the bank can credibly commit to a contract, the optimal contract results in socially excessive early withdrawals in every equilibrium of the post-deposit subgame. Thus, even at the best equilibrium the socially efficient outcome is not achieved, and agents? behavior exhibits features of a bank run. In the case where commitment is not possible, there are strictly more early withdrawals and strictly lower welfare than the full-commitment equilibrium. |
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