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Instituto Valenciano de Investigaciones Económicas

Publications

On the effects of deposit insurance and observability on bank runs: an experimental study
WP-AD 2011-05
On the effects of deposit insurance and observability on bank runs: an experimental study
Kiss, H.J., Rodríguez, I. and Rosa, A.
Year of publication: 2011
Keywords: deposit insurance, observability, bank runs, experimental economics
JEL Classification: G21, C90
Abstract
We study the effects of deposit insurance and observability of previous actions on the emergence of bank runs by means of a controlled laboratory experiment. We consider three depositors in the line of a bank, who decide between withdrawing or keeping their money deposited. We have three treatments with different levels of deposit insurance which reflect the losses a depositor may incur in the case of a bank run. We find that different levels of deposit insurance and the possibility of observing other depositors' actions affect the likelihood of bank runs. When decisions are not observable, higher levels of deposit insurance decrease the probability of bank runs. When decisions are observable, this is not the case. These results suggest that (i) observability might be considered as a partial substitute of deposit insurance, and that (ii) the optimal deposit insurance should take into account the degree of observability.