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The initial deposit decision and the occurrence of bank runs

Author

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  • Johan de Jong

    (University of Amsterdam)

Abstract
In studies of bank runs the initial deposit decision is typically not taken into account. However, it is unlikely that people will entrust money to a bank that they expect to fail in the near future. The aim of this study is to investigate to what extent this mechanism prevents bank runs. It introduces an experiment in which participants first have to choose if they want to receive their endowments as a deposit in a `risky' bank that pays a high interest or a `safe' bank that pays a lower interest. After this decision they can withdraw the money from their account or leave it in to receive the interest. The availability of different deposit options leads to a very clear theoretical prediction: all choose to deposit in the risky bank with the high interest rate and consequently leave the deposit in the bank. In the experiment the first prediction is not confirmed: almost half of the participants choose to deposit in a safer alternative. However, in contrast to the control treatment in which participants are not offered a choice, only very few of those that choose the risky bank withdraw their deposits later.

Suggested Citation

  • Johan de Jong, 2021. "The initial deposit decision and the occurrence of bank runs," Tinbergen Institute Discussion Papers 21-023/I, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20210023
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    File URL: https://papers.tinbergen.nl/21000.pdf
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    Citations

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    Cited by:

    1. Hubert J. Kiss & Ismael Rodriguez-Lara & Alfonso Rosa-Garcia, 2022. "Experimental bank runs," Chapters, in: Sascha Füllbrunn & Ernan Haruvy (ed.), Handbook of Experimental Finance, chapter 25, pages 347-361, Edward Elgar Publishing.
      • Hubert J. Kiss & Ismael Rodriguez-Lara & Alfonso Rosa-Garcia, 2021. "Experimental Bank Runs," ThE Papers 21/03, Department of Economic Theory and Economic History of the University of Granada..

    More about this item

    Keywords

    Bank runs; Initial deposit decision; Experimental economics; Coordination games;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G40 - Financial Economics - - Behavioral Finance - - - General
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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