bank runs liquidity costs and investment distortions abstract in this paper we extend the diamond and dybvig 1983 model of intermediation to study further the conditions under which bank runs can occur and to consider how private parties might adjust to the existence of bank run equilibria we provide weaker necessary conditions for runs we then characterize how banks respond to the possibility of runs in their design of deposit contracts and investment decisions banks might choose to offer contracts that prevent runs but under some conditions the second best contracts will involve accepting some risk of runs in order to achieve higher expected returns from their investments

implementing efficient allocations in a model of financial intermediation abstract in a finite trader version of the diamond and dybvig j polit econ 91 1983 401 model the ex ante efficient allocation is implementable by a direct mechanism i e each trader announces the type of his own ex post preference in which truthful revelation is the strictly dominant strategy for each trader when the model is modified by formalizing the sequential service constraint cf wallace fed reserve bank minneapolis quart rev 12 1988 3 the truth telling equilibrium implements the symmetric ex ante efficient allocation with respect to iterated elimination of strictly dominated strategies

bank runs and investment decisions revisited we examine how the possibility of a bank run affects the deposit contract offered and the investment decisions made by a competitive bank cooper and ross 1998 have shown that when the probability of a run is small the bank will offer a contract that admits a bank run equilibrium we show that in this case the bank will chose to hold an amount of liquid reserves exactly equal to what withdrawal demand will be if a run does not occur in other words precautionary or excess liquidity will not be held this result allows us to determine how the possibility of a bank run affects the level of illiquid investment chosen by a bank we show that when the cost of liquidating investment early is high the level of investment is decreasing in the probability of a run however when liquidation costs are moderate the level of investment is actually increasing in the probability of a run

temporary boycotts as self fulfilling disruptions of markets abstract this paper demonstrates how equilibrium involving anticipated boycotts and actual boycotts can occur even though consumers are negligible and only care about the price they pay and the timing of purchase the model is a two period durable goods monopoly game with demand uncertainty first a non boycott equilibrium is characterized under regularity assumptions ruling out multiplicative uncertainty there are additional equilibria in which the firm sets a low price in period 0 based on the anticipation that consumers will boycott whenever the price exceeds a threshold also the augmented game with a publicly observed sunspot has equilibria in which boycotts occur on the equilibrium path with positive probability

the livelihood impacts of cash transfers in sub saharan africa beneficiary perspectives from six countries summary cash transfers cts are a social protection mechanism to reduce the poorest households vulnerability to shocks and build human capital by smoothing consumption and sustaining expenditure on education and social welfare our study examines whether and how cts go beyond welfare objectives to promote livelihoods presenting a cross case analysis using original qualitative data on beneficiary perspectives from six african countries kenya ethiopia malawi lesotho zimbabwe and ghana we explore ct livelihood impacts within household economies and social networks paying attention to gender issues we find that a small but predictable flow of cash improves strategic livelihood choices and stimulates productive investments including through positive effects on beneficiary entry into risk sharing arrangements and networks for economic collaboration levels of household vulnerability and labor constraint nevertheless significantly mediate the ability of cts to consolidate livelihood outcomes the varying availability of economic opportunities plus effective program implementation also shape livelihood impact incorporating beneficiary perspectives brings to the fore the multi dimensionality of ct effects on experiences of poverty and deprivation including gender dynamics and intangibles such as dignity and respect they add powerful realism to the influence of the ct on both immediate survival and livelihood choices beyond this they confirm wider knowledge on productive impact and bring nuance to the conditions under which and mechanisms by which beneficiaries use cts to build productive capability and assets and to make strategic livelihood choices

bank runs and institutions the perils of intervention we study ex post efficient policy responses to a run on the banking system and the ex ante incentives these responses create we show that the efficient response to a run is typically not to freeze all remaining deposits since doing so imposes heavy costs on some individuals instead once a run is underway benevolent government institutions would allow additional deposit withdrawals placing further strain on the banking system when depositors anticipate these extra withdrawals their incentive to participate in the run increases in fact ex post efficient interventions can generate the conditions necessary for a self fulfilling run to occur jel g21 g8

on avoiding bank runs abstract can bank runs be avoided and should they be avoided i analyze a banking environment where bank runs can occur as a result of negative signals about the bank s investments in this environment banks can make sure that runs do not occur by designing the deposit contract appropriately i show that there are conditions under which it is profit maximizing for the bank to avoid runs and others under which occasional runs are part of optimal bank behavior i also compare the banking arrangement to an arrangement based on trading in equity

demand deposit contracts and bank runs with present biased preferences abstract this paper extends the diamond dybvig model of bank runs by incorporating hyperbolic discounting the main question is how consumers myopic decisions affect the possibility of a bank run and the bank s optimal contract under hyperbolic discounting consumers deposit preferences differ from their withdrawal preferences therefore the bank needs to consider two separate preferences when designing the optimal banking contract making it more difficult to design a run safe banking contract this difference in preferences could increase the possibility of a bank run in equilibrium although the bank can design a run proof contract the ex ante welfare through banking services will be lower under hyperbolic discounting due to its tighter incentive compatibility constraint

pre play research in a model of bank runs se estudia un modelo de corrida bancaria en el que los depositantes no llegaron a un consenso sobre la accion a elegir pero pueden informarse acerca de las intenciones de los otros jugadores la propiedad de equilibrio indeterminado reaparece en el juego con adquisicion de informacion en el escenario bajo analisis el equilibrio con niveles positivos de adquisicion de informacion resulta en mayores probabilidades de quiebra del banco la correlacion en las senales aumenta el espacio de parametros para el cual existen equilibrios con niveles positivos de adquisicion de informacion y mayor probabilidad de quiebra del banco

diffusing coordination risk in a regime change game privately informed agents sequentially decide whether to attack without observing others previous actions to dissuade them from attacking a principal adopts a dynamic information disclosure policy frequent viability tests a viability test publicly discloses whether the regime has survived the previous attacks when such tests are sufficiently frequent in the unique cutoff equilibrium agents never attack if the regime passes the latest test regardless of their private signals we apply this theory to demonstrate that a borrower can eliminate panic based runs by sufficiently diffusing the rollover choices across different maturity dates

reconciling bagehot and the fed s response to september 11 bagehot 1873 states that to prevent bank panics a central bank should provide liquidity at a very high rate of interest in contrast most of the theoretical literature on liquidity provision suggests that central banks should lend at an interest rate of zero this is broadly consistent with the federal reserve s behavior in the days following september 11 2001 this paper shows that both policies can be reconciled with commodity money as in bagehot s time liquidity is scarce and a high price allows banks to self select in contrast the fed has a virtually unlimited ability to temporarily expand the money supply so self selection is unnecessary

from cash in the market pricing to financial fragility we review some recent research that explores the relationship between asset price volatility and financial fragility when markets and contracts are incomplete jel e5 g2

the macro effects of unemployment benefit extensions a measurement error approach by how much does an extension of unemployment benefits affect macroeconomic outcomes such as unemployment answering this question is challenging because u s law extends benefits for states experiencing high unemployment we use data revisions to decompose the variation in the duration of benefits into the part coming from actual differences in economic conditions and the part coming from measurement error in the real time data used to determine benefit extensions using only the variation coming from measurement error we find that benefit extensions have a limited influence on state level macroeconomic outcomes we apply our estimates to the increase in the duration of benefits during the great recession and find that they increased the unemployment rate by at most 0 3 percentage point

potential unemployment insurance duration and labor supply the individual and market level response to a benefit cut we examine how a 16 week cut in potential unemployment insurance ui duration in missouri affected search behavior of ui recipients and the aggregate labor market using a regression discontinuity

on the future of macroeconomics a new monetarist perspective this article argues that a pressing goal for macroeconomics is to incorporate financial considerations but we need models with solid microfoundations in particular the use of assets in facilitating exchange as well as different credit or other financial arrangements should be outcomes of not inputs to theories as a preview i suggest that mainstream macro does a good job explaining many phenomena and a financial crisis does not disprove such theory but understanding crises requires better incorporating factors related to money credit banking and liquidity the approach called new monetarist economics can help a lot in this regard

financial fragility and over the counter markets abstract this paper studies the interaction between financial fragility and over the counter otc markets i model the financial sector as a large number of investors divided into different groups which i interpret as financial institutions and a large number of dealers financial institutions and dealers trade assets in an otc market a la duffie et al 2005 and lagos and rocheteau 2009 investors receive privately observed preference shocks and financial institutions use the balanced team mechanism proposed by athey and segal 2013 to implement an efficient risk sharing arrangement among their investors when the market is liquid in the sense that search and bargaining are small frictions i show that the economy is likely to have a unique equilibrium and therefore is not fragile when these frictions are severe a run equilibrium exists investors announce low valuation of assets because they believe everyone else in their financial institution is doing the same conditional on bank runs existing the welfare impact of the search friction is ambiguous during runs trade is inefficient and as a result a friction that reduces trade during runs has the potential to improve welfare this result is in sharp contrast with the existing literature which suggests that search friction has a negative impact on welfare

how amsterdam got fiat money abstract a fiat money system was introduced in the seventeenth century by a prominent public bank of the time the bank of amsterdam employing data from the bank s archives we show that bank money became a more attractive transactions medium following a 1683 policy change which unbundled the bank s account balances from a right to redeem these balances in coin balances not matched by a redemption right became fiat this change also stabilized the value of bank money as a unit of account freed the bank from defensive open market operations and promoted seigniorage collection

the role of independence in the green lin diamond dybvig model abstract green and lin study a version of the diamond dybvig model with a finite number of agents independence independent determination of each agent s type and sequential service for special preferences they show that the ex ante first best allocation is the unique equilibrium outcome of the model with private information about types via a simple argument it is shown that uniqueness of the truth telling equilibrium holds for general preferences and in particular for a constrained efficient allocation whether first best or not the crucial assumption is independence

banking crises and liquidity in a monetary economy abstract this study investigates banks liquidity provision using the lagos and wright model of monetary exchange with aggregate uncertainty we show that banks sometimes exhaust their cash reserves and fail to satisfy their depositors needs for consumption smoothing we also show that banking crises can be eliminated by a rate of return equalizing policy under perfect risk sharing but the first best outcome can be only achieved with the friedman rule these results cannot be obtained with other monetary models e g overlapping generations models we also derive a rich array of non trivial effects of inflation on equilibrium deposits the probability of banking crises and banks portfolios

bank incentives contract design and bank runs abstract we study the diamond dybvig bank runs deposit insurance and liquidity j polit econ 91 1983 401 419 model as developed in green and lin implementing efficient allocations in a model of financial intermediation j econ theory 109 2003 1 23 and peck and shell equilibrium bank runs j polit econ 111 2003 103 123 we dispense with the notion of a bank as a coalition of depositors instead our bank is a self interested agent with a technological advantage in record keeping we examine the implications of the resulting agency problem for the design of bank contracts and the possibility of bank run equilibria for a special case we discover that the agency problem may or may not simplify the qualitative structure of bank liabilities we also find that the uniqueness result in green and lin implementing efficient allocations in a model of financial intermediation j econ theory 109 2003 1 23 is robust to our form of agency but that the non uniqueness result in peck and shell equilibrium bank runs j polit econ 111 2003 103 123 is not

banking panics and policy responses we study how banking panics unfold in av ersion of the diamond and dybvig 1983 model with limited commitment as is well known the banking authority could eliminate the possibility of a run on the banking system by committing to suspend payments to depositors if a run were to start once a run is under way however the banking authority will choose to reschedule rather than suspend payments we construct equilibria in which depositors run on the banking system with positive probability and we show that an equilibrium bank run in this setting is necessarily partial with only some depositors participating we also show that a run naturally occurs in waves with each wave of withdrawals prompting a further policy response from the banking authority the number of waves that occur in equilibrium is stochastic and can be arbitrarily large

a bank runs model with a continuum of types abstract we consider a bank runs model a 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

evaluating theories of bank runs with heterogeneity restrictions this paper empirically tests theories of bank runs we use a structural panel var to extract runs from deposit market data identification exploits cross sectional heterogeneity in deposit insurance we identify bank runs as adverse deposit market supply shocks hitting uninsured banks harder compared to insured conditional on a run we study the behavior of uninsured banks with bad and good fundamentals we find that both experience runs but deposit outflows at the former are more severe panic effects which affect all uninsured deposits alike irrespective of fundamentals dominate in the aggregate insured banks partially absorb the outflow of uninsured deposits

reaching the poor cash transfer program targeting in cameroon identifying and selecting poor households with efficient targeting methods is essential for effective poverty alleviation programs this paper assesses the ex post performance of two popular targeting mechanisms proxy means testing pmt and community based targeting cbt in a pilot cash transfer program in cameroon several indicators and metrics to measure each method s performance in terms of inclusion of poor households and exclusion of non poor households are employed results consistently show that cbt performs poorly in terms of selecting households with low per capita consumption when compared to pmt cbt appears to select households with low physical and human capital regardless of actual consumption level however cbt also shows more variability in the selection decision than pmt even when alternative poverty definitions are used as robustness tests the pmt method used in the pilot slightly outperforms other targeting methods hybrid alternative pmt and universal targeting with equal budget but errors remain high when selecting 35 of the population for program participation the results suggest caution is needed in employing cbt methods to select households with low per capita consumption in an environment where poverty levels are high and administrative capacities are limited cbt performance may be improved through more uniform and consistent guidance on program selection criteria and process including explicit criteria that enable cbt monitoring as well as a better integration between pmt and cbt

monitoring the monitor an incentive structure for a financial intermediary this paper studies financial intermediation i e delegated monitoring in a costly state verification model there are a finite number of agents thus the intermediary cannot fully diversify its portfolio and is subject to default risk the role of the intermediary is to satisfy simultaneously the different portfolio preferences of borrowers and lenders two questions arise when a delegated monitor is subject to non trivial default risk a what arrangement solves the problem of monitoring the monitor b what intermediary portfolio accomplishes optimal asset transformation between borrowers and lenders unlike previous delegated monitoring studies the law of large numbers is not sufficient to obtain our results instead we appeal to a stronger results the large deviation principle which establishes that convergence in the law of large numbers is exponential

a model of a systemic bank run abstract this paper provides a model of the view that the 2008 financial crisis is reminiscent of a bank run focussing on six stylized key features in particular core financial institutions have invested their funds in asset backed securities rather than committed to long term projects in distress these can potentially be sold to a large pool of outside investors at steep discounts i consider two different motives for outside investors and their interaction with banks trading asset backed securities uncertainty aversion versus adverse selection i shall argue that the version with uncertainty averse investors is more consistent with the stylized facts than the adverse selection perspective in the former the crisis deepens the larger the market share of distressed core banks while a run becomes less likely instead as a result in the adverse selection version therefore the outright purchase of troubled assets by the government at prices above current market prices may both alleviate the financial crises as well as provide tax payers with returns above those for safe securities

bank runs as an equilibrium phenomenon a standard demand deposit contract in which individuals are entitled to their full deposit at any time provided the bank is solvent is analyzed in a context in which there are no exogenous events on which agents condition their behavior and a unique equilibrium involving a bank run with positive probability is shown to exist

distinguishing panics and information based bank runs welfare and policy implications in this paper we contrast panics and information based bank runs in an effort to provide a robust and empirically plausible model of how bank runs are triggered the model of information based runs is characterized by two sided asymmetric information the bank cannot observe the true liquidity needs of the depositors while depositors are asymmetrically informed about bank asset quality we also examine the relative degrees of risk sharing provided by bank deposit contracts and traded equity contracts we show that the choice of deposit or equity depends on the attributes of and information about the underlying investment returns

inequality of opportunity in sub saharan africa in the last decades inequality of opportunity has been extensively studied by economists on the assumption that in addition to being normatively undesirable it can be related to low potential for growth this paper evaluates inequality of opportunity and the different sources of unequal opportunities in 11 sub saharan africa countries the results indicate that the portion of total inequality that can be attributed to exogenous circumstances that is circumstances outside the control of individuals control is between 30 percent and 40 percent in the countries considered the results also indicate a positive association between total consumption inequality and inequality of opportunity finally this paper addresses a number of methodological issues that typically arise when measuring inequality of opportunity with imperfect data which is the typical case in developing countries

bank runs as coordination failures an experimental study we use experimental methods to investigate what factors contribute to breakdowns in coordination among a bank s depositors subjects in our experiment decide whether to leave their money deposited in a bank or withdraw it early a bank run occurs when there are too many early withdrawals we explore the effects of adding uncertainty about fundamental withdrawal demand and of changing the number of opportunities subjects have to withdraw our results show that i bank runs are rare when fundamental withdrawal demand is known but occur frequently when it is stochastic and ii subjects are more likely to withdraw when given multiple opportunities to do so than when presented with a single decision for the multiple opportunity case we evaluate individual withdrawal decisions according to a set of simple cutoff rules we find that the cutoff rule corresponding to the payoff dominant equilibrium of the game which involves bayesian updating of probabilities explains subject behavior better than other rules

currency elasticity and banking panics theory and evidence existing models of banking panics contain no role for monetary factors and fail to explain why some banking systems experienced panics while others did not a monetary model is constructed where seasonal variations in the demand for liquidity and credit play a critical role in generating banking panics these panics occur when there are restrictions on the issue of currency in private banks but they do not occur if banks are unrestricted empirical evidence from canada and the united states for the period 1880 1910 is largely consistent with the predictions of the model

money intermediation and banking the business of money creation is conceptually distinct from that of intermediation yet these two activities are frequently but not always combined together in the form of a banking system we develop a simple model to examine the question when is banking essential there is a role for money due to a lack of record keeping and a role for intermediation due to the existence of private information both money and intermediation are essential when monitoring costs associated with intermediation are sufficiently low the two activities can be separated from one another however when monitoring costs are sufficiently high a banking system that combines these two activities is essential

bank run psychology abstract banks are inherently susceptible to panics and bank runs due to the problem of maturity mismatch resulting in both a stable equilibrium in which the bank survives and an unstable equilibrium in which a bank run occurs understanding equilibrium selection in this setting is extremely important for safeguarding financial stability in this paper one new potential factor that determines whether a bank runs gets triggered or not is experimentally studied namely the psychological state of the depositor prior to participating in an experimental bank run game subjects are either induced with fear sadness or happiness using an autobiographical emotion induction task the findings suggest that the presence of background fear significantly increases the likelihood of withdrawal and a subsequent bank run in addition women are shown to be significantly more likely to withdraw then men but only in the fear induction treatment

banking crises in monetary economies this paper analyzes the effect of inflation on banking crises in a model in which money and banks play essential roles the model s equilibrium replicates some key features of actual banking crises namely the partial suspension of payments and the desire to hold cash even in the absence of pressing liquidity needs when banks have access to a stable foreign currency inflation has a threshold effect on banking crises higher inflation reduces the likelihood of crises when inflation is below the threshold the reverse happens when inflation exceeds the threshold this result appears to be broadly consistent with available evidence jel category e40 e50

financial intermediaries and liquidity creation trading losses associated with information asymmetries can be mitigated by designing securities which split the cash flows of underlying assets these securities which can arise endogenously have values that do not depend on the information known only to informed agents bank debt deposits is an example of this type of liquid security which protect relatively uninformed agents and we provide a rationale for deposit insurance in this content high grade corporate debt and government bonds are other examples implying that a money market mutual fund based payments system may be an alternative to one based on insured bank deposits

optimal diamond dybvig mechanism in large economies with aggregate uncertainty abstract this paper characterizes the direct mechanism which implements the constrained optimal outcome in a version of diamond and dybvig 1983 with aggregate uncertainty and a continuum of agents using this result numerical examples where the best direct mechanism has a bank run equilibrium are easily obtained

financial intermediation and delegated monitoring this paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders it presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary diversification within an intermediary serves to reduce these costs even in a risk neutral economy the paper presents some more general analysis of the effect of diversification on resolving incentive problems in the environment assumed in the model debt contracts with costly bankruptcy are shown to be optimal the analysis has implications for the portfolio structure and capital structure of intermediaries

deposit competition and financial fragility evidence from the us banking sector preliminary and incomplete please do not cite without permission we develop and estimate an empirical model of the u s banking sector using a new data set covering the largest u s banks over the period 2002 2013 our model incorporates insured depositors and run prone uninsured depositors who have rich preferences over dierentiated banks banks compete for deposits in the spirit of matutes and vives 1996 and can endogenously default we estimate demand for uninsured

a model of financial fragility abstract this article presents a dynamic stochastic game theoretic model with two essential features first agents hold diversified portfolios that link their financial positions to those of other agents second shocks to fundamentals at the initial date cause some portfolio losses agents who incur losses reallocate their portfolios thereby breaking some linkages in the pareto efficient symmetric equilibrium studied two related types of financial crisis can occur in response one occurs gradually as losses spread breaking more links the other type occurs instantaneously when forward looking agents preemptively shift to safer portfolios to avoid future losses from contagion an economy is more fragile the earlier its last remaining link breaks from such a crisis journal of economic literature classification numbers c7 e00 e3 e44 g1

interest rates and financial fragility abstract how do the interest rates banks earn on their assets affect the susceptibility of the banking system to a self fulfilling run by depositors i study this question in a version of the model of diamond and dybvig 1983 with limited commitment and a non trivial portfolio choice i show that the relationship between these interest rates and financial fragility is often non monotone for example a small increase in the return on illiquid investment or a small increase in the term premium may raise banks susceptibility to a run while a larger increase would make the banking system more stable the same is true for changes in short term rates holding the longer term rates fixed i provide a precise characterization of these comparative statics of financial fragility

unemployment fears and deflationary spirals the interaction of incomplete markets and sticky nominal wages is shown to magnify business cycles even though these two features in isolation dampen them during recessions fears of unemployment stir up precautionary sentiments which induces agents to save more the additional savings may be used as investments in both a productive asset equity and an unproductive asset money but even a small rise in money demand has important consequences the desire to hold money puts deflationary pressure on the economy which provided that nominal wages are sticky increases wage costs and reduces firm profits lower profits repress the desire to save in equity which increases the fear of unemployment and so on this is a powerful mechanism which causes the model to behave differently from both its complete markets version and a version with incomplete markets but without aggregate uncertainty in contrast to previous results in the literature agents uniformly prefer non trivial levels of unemployment insurance

run equilibria in the green lin model of financial intermediation abstract we study the green lin model of financial intermediation e j green p lin implementing efficient allocations in a model of financial intermediation j econ theory 109 2003 1 23 under a more general specification of the distribution of types across agents we derive the efficient allocation in closed form we show that in some cases the intermediary cannot uniquely implement the efficient allocation using a direct revelation mechanism in these cases the mechanism also admits an equilibrium in which some but not all agents run on the intermediary and withdraw their funds regardless of their true liquidity needs in other words self fulfilling runs can arise in a generalized green lin model and these runs are necessarily partial with only some agents participating

the role of demandable debt in structuring optimal banking arrangements demandable debt finance by banks warrants explanation because it entails costs of bank suspension liquidation and idle reserve holdings an explanation is developed in which demandable debt provides incentive compatible intermediation where the banker has comparative advantage in allocating investment funds but may act against the interests of uninformed depositors demandable debt attracts funds by giving depositors an option to force liquidation its usefulness in transacting follows from information sharing between monitors and nonmonitors copyright 1991 by american economic association

cash or in kind transfers evidence from a randomised controlled trial in delhi india this article examines a randomised intervention in delhi india that provided unconditional cash transfers to a group of households as a replacement for the food security offered by a below poverty level card the experimental approach can differentiate beneficial effects due to either unconditional cash transfers or newly opened bank accounts the unconditional cash transfer does not induce a decline in food security rather it provides opportunities for households to shift to other nutritious options in non cereal product categories

financial fragility liquidity and asset prices we define a financial system to be fragile if small shocks have disproportionately large effects in a model of financial intermediation we show that small shocks to the demand for liquidity cause either high asset price volatility or bank defaults or both furthermore as the liquidity shocks become vanishingly small the asset price volatility is bounded away from zero in the limit economy with no shocks there are many equilibria however the only equilibria that are robust to the introduction of small liquidity shocks are those with non trivial sunspot activity

inequality and financial fragility abstract i study how the distribution of wealth influences the government s response to systemic banking crises and shapes financial fragility distributional concerns tend to make full government guarantees of deposits credible for relatively poor individuals but not for wealthier individuals as a result wealthier individuals have a stronger incentive to panic and in equilibrium the institutions in which they invest are endogenously more likely to experience runs and receive partial bailouts even under utilitarian government moreover the shape of the wealth distribution affects the level of financial fragility recognizing this fact may alter the government s desire to redistribute wealth ex ante

economic growth liquidity and bank runs abstract we construct an endogenous growth model in which bank runs occur with positive probability in equilibrium in this setting a bank run has a permanent effect on the levels of the capital stock and of output in addition the possibility of a run changes the portfolio choices of depositors and of banks and thereby affects the long run growth rate these facts imply that both the occurrence of a run and the mere possibility of runs in a given period have a large impact on all future periods a bank run in our model is triggered by sunspots and we consider two different equilibrium selection rules in the first a run occurs with a fixed exogenous probability while in the second the probability of a run is influenced by banks portfolio choices we show that when the choices of an individual bank affect the probability of a run on that bank the economy both grows faster and experiences fewer runs

a unified welfare analysis of government policies we conduct a comparative welfare analysis of 133 historical policy changes over the past half century in the united states focusing on policies in social insurance education and job training taxes and cash transfers and in kind transfers for each policy we use existing causal estimates to calculate both the benefit that each policy provides its recipients measured as their willingness to pay and the policy s net cost inclusive of long term impacts on the government s budget we divide the willingness to pay by the net cost to the government to form each policy s marginal value of public funds or its mvpf comparing mvpfs across policies provides a unified method of assessing their impact on social welfare our results suggest that direct investments in low income children s health and education have historically had the highest mvpfs on average exceeding 5 many such policies have paid for themselves as governments recouped the cost of their initial expenditures through additional taxes collected and reduced transfers we find large mvpfs for education and health policies amongst children of all ages rather than observing diminishing marginal returns throughout childhood we find smaller mvpfs for policies targeting adults generally between 0 5 and 2 expenditures on adults have exceeded this mvpf range in particular if they induced large spillovers on children we relate our estimates to existing theories of optimal government policy and we discuss how the mvpf provides lessons for the design of future research

equivalence between the diamond dybvig banking model and the optimal income taxation model abstract it is shown that the diamond dybvig journal of political economy 96 1983 768 banking model with a continuum of types of agents has the same analytical structure as the standard optimal income taxation model review of economic studies 38 1971 175 review of economic studies 43 1976 261 insights from the income taxation literature immediately imply that a bank run equilibrium exists in the banking model as long as the long term project is sufficiently costly to liquidate

social protection 2 0 exploring issues evidence and debates in a globalizing world abstract this paper reviews the growing literature on social protection while not new the concept evolved remarkably in recent years it is approached from a multitude of perspectives and intersects with broader bodies of literature particularly around public policy pro poor growth rights humanitarian strategies and aid effectiveness as well as feeding into specific programmatic issues e g conditionality targeting and transfer selection this blend of challenges and approaches has often made debates elusive and polarized the paper examines the evolution and definitions of social protection and unbundles critical policy institutional and implementation quandaries taken together these considerations shape a set of context specific models of social protection the paper s five core conclusions may help chart future directions for social protection research and practice

we are all poor here economic difference social divisiveness and targeting cash transfers in sub saharan africa abstract while the central thrust of michael lipton s work has been the crucial role of productivity gains in small farm agriculture for rural poverty reduction in many sub saharan african countries this desirable outcome has stubbornly refused to materialise and growing numbers of rural poor people are found persistently to fail to secure even minimal acceptable levels of food consumption a social protection policy response is to target social cash transfers to the chronic extreme poor this article focuses on the level of cash transfers relative to income differences between households in the bottom half of the income distribution and the social tensions that arise from beneficiary selection and exclusion it is found that cash transfers to target groups such as the poorest 10 per cent or the ultra poor labour constrained must be set low even below the welfare levels they seek to achieve if they are to avoid socially invidious reshuffling of the income distribution the article identifies crit

on freezing depositor funds at financially distressed banks an experimental analysis this article reports an experiment conducted to evaluate the effects of alterations in the terms of repayments to depositors following a liquidity suspension as well as the effect of alterations in the publicity of information about withdrawal behavior on the fragility of distressed banks results indicate that a tough renegotiation stance of protecting depositors who maintain their money in the bank can quite effectively promote stability information provided to depositors regarding past withdrawal behavior weakens the effectiveness of a tough renegotiation policy but reduces fragility somewhat for a more lenient rescheduling condition

truthful revelation in the diamond and dybvig banking environment abstract the welfare analysis in the diamond and dybvig banking literature has been conducted by appealing to the revelation principle the best banking arrangement that induces truthtelling by depositors is characterized and it is asserted presumably by appeal to the revelation principle that no other arrangement could give higher welfare this appeal to the revelation principle is however not straightforward because the diamond and dybvig environment includes a sequential service constraint which is not present in standard formulations of the revelation principle this paper justifies the use of the revelation principle in sequential service environments

dynamic debt runs we develop a dynamic model of debt runs on a rm which invests in an illiquid asset by rolling over staggered short term debt contracts i e dierent contracts mature at dierent times we derive a unique threshold equilibrium in which creditors coordinate their asynchronous rollover decisions based on the rm s publicly observable and time varying fundamental the coordination problem ampli es the creditors concerns about the rm s future rollover risk created by its time varying fundamental and causes each maturing creditor to run ahead of others even when the current fundamental is substantially higher than its liability our model provides a set of implications on the roles played by volatility illiquidity and debt maturity in driving debt runs as well as on rms capital adequacy standards and credit risk

the equilibrium impact of unemployment insurance on unemployment evidence from a non linear policy rule abstract we estimate the macro effect of an increase in the generosity of unemployment insurance ui on unemployment in sweden using regional data the national ui benefit formula features a benefit ceiling and a statutory replacement rate and does not take regional wage differentials into account changes in the national rules are useful for identification since a change in the benefit ceiling for example has a greater impact on ui generosity in a high wage region than in a low wage region because a greater fraction of the workforce will be affected by the benefit ceiling in the high wage region we implement this identification strategy using data for the swedish municipalities over the time period 1992 2014 our estimates suggest that the macro elasticity of an increase in ui on unemployment is around 3 this is twice as large as the corresponding micro elasticity which we estimate to 1 4 1 5 using data from the same time period

should unemployment insurance vary with the unemployment rate theory and evidence we study how the marginal welfare gain from increasing the unemployment insurance ui bene t level varies over the business cycle we do this by estimating how the moral hazard cost and the consumption smoothing bene t of ui vary with labor market conditions which we identify using variation in the interaction of ui bene t levels with the unemployment rate within u s states over time we nd that the moral hazard cost is procyclical greater when the unemployment rate is relatively low by contrast we do not nd evidence that the consumption smoothing bene t varies with the unemployment rate we use these empirical results to estimate the marginal welfare gain and we nd that it is modest on average but varies positively with the unemployment rate jel h5 j64 j65

government policy and the probability of coordination failures this paper introduces an approach to the study of optimal government policy in economies characterized by a coordination problem and multiple equilibria such models are often criticized as not being useful for policy analysis because they fail to assign a unique prediction to each possible policy choice we employ a selection mechanism that assigns ex ante a probability to each equilibrium indicating how likely it is to obtain we show how such a mechanism can be derived as the natural result of an adaptive learning process this approach leads to a well defined optimal policy problem and has important implications for the conduct of government policy we illustrate these implications using a simple model of technology adoption under network externalities

experimental evidence of bank runs as pure coordination failures abstract we investigate how coordination requirement measured by the coordination parameter affects the occurrence of miscoordination based bank runs in controlled laboratory environments we identify an indeterminacy region of the coordination parameter such that games with the parameter within the region have varying coordination outcomes and exhibit persistent path dependence experimental economies with the parameter above below the region stay close or converge to the run non run equilibrium switches between the two equilibria occur even with fixed economic fundamentals the experimental results are well accounted for by a version of the evolutionary algorithm that uses experimentation rates estimated from the experimental data

the optimal timing of unemployment benefits theory and evidence from sweden this paper provides a simple yet robust framework to evaluate the time profile of benefits paid during an unemployment spell we derive sufficient statistics formulae capturing the marginal insurance value and incentive costs of unemployment benefits paid at different times during a spell our approach allows us to revisit separate arguments for inclining or declining profiles put forward in the theoretical literature and to identify welfare improving changes in the benefit profile that account for all relevant arguments jointly for the empirical implementation we use administrative data on unemployment linked to data on consumption income and wealth in sweden first we exploit duration dependent kinks in the replacement rate and find that if anything the moral hazard cost of benefits is larger when paid earlier in the spell second we find that the drop in consumption affecting the insurance value of benefits is large from the start of the spell but further increases throughout the spell in trading off insurance and incentives our analysis suggests that the at benefit profile in sweden has been too generous overall however both from the insurance and the incentives side we find no evidence to support the introduction of a declining tilt in the profile

panic bank runs we provide experimental evidence that panic bank runs occur in the absence of problems with fundamentals and coordination failures among depositors the two main culprits identified in the literature depositors withdraw when they observe that others do so even when theoretically they should not our findings suggest that panic also manifests itself in the beliefs of depositors who overestimate the probability that a bank run is underway loss aversion has a predictive power on panic behavior while risk or ambiguity aversion do not

the seasonality of banking failures during the late national banking era in this paper we expand previous models with banks and money and explore the consequences of seasonals in the banking system we find that when bank failures occur not all of them have associated large output losses and currency premiums exist we show that the most important sources of seasonal fluctuations for the banking system are those related to the return on farming activities and the scrapping value of the initial investment finally this model is consistent with the notion that the treasury is more likely to accommodate the money market in periods where the liquidity needs

liquidity uncertainty and intermediation the paper performs a welfare comparison between demand deposit and equity contracts in the presence of intrinsic aggregate uncertainty in this framework the welfare dominance of deposit contracts emerges under corner preferences it is shown that aggregate uncertainty creates high price volatility of ex dividend equity claims traded in a secondary market and the resulting consumption allocations offer less risk sharing opportunities to risk averse consumers than tailor made deposit contracts the contingency of early payoffs on depositors withdrawal order reinforces the welfare performance of deposit contracts whereas costly liquidation of productive long term investments deteriorates their welfare performance relative to equity contracts

on the effects of deposit insurance and observability on bank runs an experimental study 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 need not to be the case these results suggest that i observability might be considered as a partial substitute of deposit insurance and ii the optimal deposit insurance should take into account the degree of observability

deposit contract design with relatively partially honest agents abstract the efficient outcome of a deposit contract model is uniquely implementable with relatively partially honest agents while it is never uniquely implementable only with materially self interest agents

equilibrium bank runs we analyze a banking system in which the class of feasible deposit contracts or mechanisms is broad the mechanisms must satisfy a sequential service constraint but partial or full suspension of convertibility is allowed consumers must be willing to deposit ex ante we show by examples that under the so called optimal contract the postdeposit game can have a run equilibrium given a propensity to run triggered by sunspots the optimal contract for the full predeposit game can be consistent with runs that occur with positive probability thus the diamond dybvig framework can explain bank runs as emerging in equilibrium under the optimal deposit contract

banking and insurance abstract this paper studies the economic role of financial institutions in economies where agents incomes are subject to privately observable idiosyncratic random events the information structure precludes conventional insurance arrangements however a financial institution perhaps best viewed as a savings bank can provide partial insurance by generating a time pattern of deposit returns that redistributes wealth from agents with high incomes to those with low incomes resulting in a level of expected utility higher than that achievable in simple security markets insurance is incomplete because the bank faces a tradeoff between provision of insurance and maintenance of private incentives

banks and markets in a monetary economy abstract modern financial sectors consist of banks asset markets and a central bank this paper builds a model where these institutions provide different financial services and their interaction supports efficient allocations when one institution is missing equilibria are by construction inefficient the paper analyzes how interest rates and asset prices depend on the structure of the financial sector and characterizes the central bank policy that supports efficient allocations the analysis relies on the difference between liquidity and real shocks and relates the notion of liquidity used in this paper to the one adopted in other studies

an experimental exploration of self fulfilling banking panics their occurrence persistence and prevention this article tests the possibility and the degree of persistence of self fulfilling banking panics through an experimental protocol panics are proved to be persistent phenomena that are difficult to prevent however it seems possible to curb them through a learning effect caused by a temporary but sufficient suspension of the deposit availability combined with a narrow banking solution which makes banks more liquid additionally panic prevention requires a full deposit coverage to be effective this suggests that the moral hazard issue should not be tackled through a lower deposit coverage especially in emerging countries banking systems where depositors are likely to lose confidence

deposit insurance a reconsideration abstract this paper undertakes a simple general equilibrium analysis of the consequences of deposit insurance programs the way in which they are priced and the way in which they fund revenue shortfalls in our economy the central issue in analyzing deposit insurance is how the government will make up any fdic losses deposit insurance premia matter only in so far as they affect the level of implied fdic revenue shortfalls moreover local variations in the magnitude of fdic losses will generically be irrelevant for the determination of any equilibrium quantities that affect agent welfare however large enough changes in these losses can matter there is no presumption that keeping these shortfalls low is a good idea finally we show that multiple pareto ranked equilibria can be observed the potential for multiplicity of equilibria may depend on components of fdic policy our analysis provides counterexamples to the following propositions 1 actuarially fair pricing of deposit insurance is always desirable 2 implicit fdic subsidization of banks through deposit insurance is always undesirable 3 large fdic losses are necessarily symptomatic of a poorly designed deposit insurance system 4 risk based deposit insurance premia can easily be used to reduce moral hazard problems associated with deposit insurance provision

disincentive effects of unemployment benefits and the role of caseworkers abstract a large literature has documented that the unemployment duration of unemployment insurance ui recipients increases with the generosity of the ui system this has been interpreted as the disincentive effect of ui benefits however unemployed workers typically also have caseworkers assigned who are monitoring and assisting the job search efforts these caseworkers may respond to differences in ui eligibility by shifting resources financial or time between unemployed individuals in order to counteract the moral hazard effect of ui benefits or in order to focus resources to where they have the largest effect this suggests that the typical estimates of the disincentive effects of ui may be biased in studies that compare workers within the same ui agency we estimate whether caseworkers respond to the generosity of ui using a regression discontinuity rd design in germany where potential ui durations vary with age we show that across a wide variety of measures such as meetings sanctions and training programs ui caseworkers do not treat unemployed with different eligibility differently at best we find a very small effect that workers with shorter eligibility close to the exhaustion point are more likely to be assigned to training programs that prolong their ui eligibility the typical rd estimates of the ui disincentive effects thus seem to be valid estimates

bailouts and financial fragility how does the belief that policymakers will bail out investors in the event of a crisis affect the allocation of resources and the stability of the financial system i study this question in a model of financial intermediation with limited commitment when a crisis occurs the efficient policy response is to use public resources to augment the private consumption of those investors facing losses the anticipation of such a bailout distorts ex ante incentives leading intermediaries to choose arrangements with excessive illiquidity and thereby increasing financial fragility prohibiting bailouts is not necessarily desirable however it induces intermediaries to become too liquid from a social point of view and may in addition leave the economy more susceptible to a crisis a policy of taxing short term liabilities in contrast can correct the incentive problem while improving financial stability

could making banks hold only liquid assets induce bank runs abstract restrictions placed on bank portfolios are analyzed in a banking model designed to capture the role of checking accounts in facilitating transactions forcing banks to hold only liquid assets creates the incentive for liquidity based runs even when a run does not occur welfare is reduced as a result of overinvestment in the liquid asset