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

the effect of the medicaid home care benefit onlong term care choices of the elderly this paper analyses the impact of medicaid home care benefits on the probability of nursing home entry and the use of formal and informal home care by disabled elderly remaining in the community using data from the national long term care survey i find evidence that medicaid home care subsidies reduced the probability of nursing home entry among at risk elderly using formal home care among non institutionalized persons the subsidy increased the use of formal home care but led to substitution of informal with formal care for services that were non medical in nature i introduction long term care for the elderly has become an area of great interest for policymakers due to the increased number of aged americans and to the important role of government in financing and regulating their care the size of the population requiring long term care is expected to increase from about 7 million in 1988 to about 18 million by the year 2040 it is popularly believed that the elderly often lack family support and must enter nursing homes when they become chronically ill in actuality the majority of impaired elderly remain at home only 22 percent of the disabled elderly population is institutionalized and the remaining 78 percent lives in the community most receiving assistance from family members of those remaining in the community 27 percent receive formal home and community based care to augment their informal care while 3 percent receive formal services only special committee on aging 1988 private insurance rarely covers longterm care since many of the elderly cannot afford prolonged out of pocket expenditures on nursing home or home health care the public sector ends up paying for it public long term care expenditures account for 0 45 percent of gnp with most of these expenditures going towards nursing home care with rapid inflation in the health care sector policymakers have been driven to explore alternatives to nursing home care which are potentially less costly one of these alternatives is home and community based care while the idea of expanding publicly financed home and community based care programs has been enthusiastically received by the elderly and their families researchers have questioned its cost effectiveness raising two issues the first concern is that extended home care benefits may not lower nursing home use but will primarily benefit persons who would not have entered a nursing home anyway the second possibility is that home care benefits will reduce reliance on informal caregiving if recipients use the formal care to substitute for rather than supplement the unpaid care they were already receiving much of the research on how formal home care affects the provision of informal home care and the use of nursing home services has focused on all forms of formal care including care paid for out of pocket two such studies are those by newman et al 1988 and hanley et al 1991 their results are likely to differ from those of an explicit analysis of the effects of a home care subsidy for example a family will purchase formal home care services as a substitute for their own informally provided care only if the opportunity cost of caregiving is greater than the cost of the paid care on the other hand if the formal care is essentially free to the recipients their families are likely to substitute formal care for their informal services even if the cost of the formal care to society is greater than the family s opportunity cost of caregiving thus home care subsidies are likely to lead to greater substitution of formal for informal care than we would observe in the absence of subsidization it is therefore misleading to extrapolate from this previous line of research to infer the effects of expanded government home care programs research concentrating on the subsidy effect itself has often been conducted through demonstration projects

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

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

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

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

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

will aging baby boomers bust the federal budget barely ten years from now the leading edge of the baby boom generation will turn 65 ushering in a sustained aging of the u s population many are concerned that through the first half of the 21st century the federal government will stagger under the weight of these elderly baby boomers as they receive the medical retirement and disability benefits promised them the number of people over age 65 in the population is projected to increase by a factor of 2 5 by 2040 lee and tuljapurkar 1994 with the number of nursing home residents growing even more rapidly schneider and guralnick 1990 long term forecasts suggest that nearly one third of gdp will be accounted for by health care by 2030 burner waldo and mckusick 1992 warshawsky 1994 the fiscal impact of this demographic change is potentially enormous shoven topper and wise 1994 an alternative view is much more optimistic about retirement prospects for the baby boom generation this view holds that disability and morbidity will continue to become more compressed leading to healthier years later in life manton stallard and liu 1993b manton corder and stallard 1997 the average retirement age will rise productivity gains and increased tax revenue will offset the demands that aging baby boomers place on the federal budget one projection suggests the percentage of those over age 65 requiring medicaid coverage for longterm care will decline in the next century wiener illston and hanley 1994 another is that long term health care costs will decline as a fraction of median

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

should america save for its old age fiscal policy population aging and national saving he federal government has recently seen an abrupt turnaround in its budget balance from years of deficits to the now predicted years of surpluses this switch has been widely hailed since many analysts believe that the united states saves too little and that the switch to government budget surpluses can help to address that problem indeed concern about low u s saving and the long term budget outlook has increased of late as the retirement of the baby boom generation draws closer and the financial pressures associated with population aging loom larger in this paper we cite a collection of arguments for why u s fiscal policy should be used to increase national saving then we focus on whether the aging of the u s population adds force to these arguments for boosting national saving and conclude perhaps surprisingly that it may not the potential role of fiscal policy in preparing the country for the coming demographic change is at the center of recent budget proposals although the sudden emergence of budget surpluses is to a large extent based on economic and other factors beyond the government s direct control one can argue that the political will to maintain these surpluses stems in part from a desire to prepare for the retirement of the baby boomers moreover the question of whether the projected surpluses should be devoted to new spending tax cuts or debt reduction is entangled with arguments over what portion of the surpluses should go to saving social security and medicare yet the appropriate saving response to population aging is not clear cut while aging boosts the demands on future resources it also changes the rate of return the u s economy can expect from saving the net effect of aging on desired saving is

testing for the effects of concealed weapons laws specification errors and robustness abstract in 1997 john lott and david mustard published an important paper in which they found that right to carry concealed weapons laws reduce violent crime although lott and mustard appear to do all possible variations of the analysis a closer reading reveals that the study might suffer from several possibly important errors i reestimate the model and check for incorrect functional form omitted variables and possible second order bias in the t ratios lott and mustard s basic conclusions are generally robust with respect to these potential econometric problems overall right to carry concealed weapons laws tend to reduce violent crime the effect on property crime is more uncertain i find evidence that these laws also reduce burglary

more guns more crime this paper examines the relationship between gun ownership and crime previous research has suffered from a lack of reliable data on gun ownership i exploit a unique data set to reliably estimate annual rates of gun ownership at both the state and the county levels during the past two decades my findings demonstrate that changes in gun ownership are significantly positively related to changes in the homicide rate with this relationship driven almost entirely by an impact of gun ownership on murders in which a gun is used the effect of gun ownership on all other crime categories is much less marked recent reductions in the fraction of households owning a gun can explain one third of the differential decline in gun homicides relative to nongun homicides since 1993

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

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

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

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

economic growth population theory and physiology the bearing of long term processes on the this lecture sketches a theory of the secular decline in morbidity and mortality that takes account of changes induced in physiological functioning since 1700 the synergism between technological and physiological improvements has produced a form of human evolution biological though not genetic rapid culturally transmitted and not necessarily stable which is still ongoing in both oecd and developing countries thermodynamic and physiological aspects of economic growth are defined and their impact on growth rates is assessed implications of this theory for population forecasting measurement of national income demand for leisure pension policies and demand for health care are considered excerpt

the impact of gun laws a model of crime and self defense abstract we develop a model of crime and self defense that provides a rationale both for the right to bear arms and for regulating this right it also suggests that a severe punishment for gun crime might best guarantee both the security and freedom of potential victims

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

mortality decline and long run economic growth this paper examines the impacts of mortality decline on long run growth in a dynastic family two sector growth model with social security a rise in longevity has direct effects on fertility human capital investment and growth as well as indirect effects through increasing unfunded social security contributions both the direct and indirect effects depend on the relative strength of the tastes for the number and welfare of children and may have different signs the net effects of rising longevity on fertility tend to be negative but positive on human capital investment and growth c 2001 elsevier science s a all rights reserved

medical care costs how much welfare loss hardly a week goes by without a front page newspaper article on rising health care costs and the uninsured in this article i focus mainly on costs arguing that the issue has been somewhat misconceived while the level of medical care spending in the u s is a cause for concern the welfare losses associated with rises in that level of spending may not be as large as the public rhetoric can make them seem in fact cost containment may not be as urgent as is widely supposed and some proposed cost containment policies may result in welfare losses for the insured and even increase the number of uninsured

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

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

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

the occupations of regulators influence occupational regulation evidence from the us private security industry licensing requirements for us private security firms and guards differ substantially from state to state state regulatory institutions for this industry also vary considerably some states have specialized regulatory boards with industry personnel guards firm owners and or public police as board members while others rely on non specialized regulators such as departments of commerce state professional regulation or consumer affairs these cross state variations in licensing requirements and regulatory institutions provide an opportunity to explore relationships between the two private security regulation is of particular interest in this context because previous empirical research implies that allocating more resources to private security reduces crime and that relatively stringent licensing requirements limit entry thereby increasing crime a panel of 1991 2010 state data is employed to see if particular regulatory institutions are associated with particular licensing requirements empirical results suggest that requirements for entry into this market tend to be relatively strict when active private security personnel are in control of licensing and that different patterns of regulation generally apply when police or non specialized agencies control licensing therefore both public interest and private interest explanations for the observed relationships between the structure of regulatory institutions and resulting licensing requirements are discussed

privately produced general deterrence in this study we use county data on private security establishments and employment for 1977 92 to test two hypotheses first we test whether private security deters crime second we test whether john lott and david mustard s estimates of the impact of shall issue laws on crime are biased because of a lack of controls for private security we find little evidence that private security reduces the crime rates for assault or larceny some estimates suggest murder robbery and or auto theft may be deterred by private security although these results are not robust of all the index crime categories only rape is estimated to have a consistent negative relationship with private security in addition we find little evidence that the lott and mustard results are biased because of a lack of controls for the private security measures employed in this study

medical insurance technological change and welfare concerns have been expressed about the welfare effects of expensive innovations in medical care financed largely through medical insurance this paper develops a model which considers such issues it is shown that even if insurance is purchased optimally subject to a plausible constraint on the form of the contract innovations may be adopted that have the effect of reducing expected welfare the question of how the benefits of medical innovations ought to be measured in the presence of insurance is also explored

public safety through private action an economic assessment of bids private actions to avoid and prevent criminal victimisation and assist public law enforcement are vital inputs into the crime control process one form of private action the business improvement district bid appears particularly promising a bid is a non profit organisation created by property owners to provide local public goods usually including public safety our analysis of 30 los angeles bids demonstrates that the social benefits of bid expenditures on security are a large multiple about 20 of the private expenditures crime displacement appears minimal crime reduction in the bid areas has been accompanied by a reduction in arrests suggesting further savings given the vital role of private individuals and firms in determining the effectiveness of the criminal justice system and the quality and availability of criminal opportunities private actions arguably deserve a more central role in the analysis of crime and crime prevention policy 1 but the leading scholarly commentaries on the crime drop during the 1990s have largely ignored the role of the private sector blumstein and wallman 2000 levitt 2004 zimring 2007 the potentially relevant trends include growing reporting rates the growing sophistication and use of alarms monitoring equipment and locks the considerable increase in the employment of private security guards and the decline in the use of cash cook and macdonald 2010 private actions can be encouraged or discouraged through regulation of the insurance industry reducing the costs of private co operation with police and courts gun control measures and other means the justification for such measures is the reasonable presumption that many sorts of private action to avoid mitigate and respond to crime generate substantial externalities business improvement districts bids are a particularly promising institution for harnessing private action to cost effective crime control a bid is a non profit organisation created by neighbourhood property owners to provide local public goods including public safety the organisation has the power to tax all the owners in the district including those who did not sign the original petition previous evaluations of bids in los angeles la indicate that they are successful in reducing crime rates brooks 2008 macdonald et al 2009 we provide a further analysis of the costs and benefits including the effect on arrests and spillovers and we estimate a dose response

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

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

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

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

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

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

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

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

does the right to carry concealed handguns deter countable crimes only a count analysis can say abstract an analysis of the effects of right to carry laws on crime requires particular distributional and structural considerations first because of the count nature of crime data and the low number of expected instances per observation in the most appropriate data least squares methods yield unreliable estimates second use of a single dummy variable as a measure of the nationwide effect of right to carry laws is likely to introduce geographical and intertemporal aggregation biases into the analysis in this paper we use a generalized poisson process to examine the geographical and dynamic effects of right to carry laws on reported homicides rapes and robberies we find that the effects of such laws vary across crime categories u s states and time and that such laws appear to have statistically significant deterrent effects on the numbers of reported murders rapes and robberies

money output and inflation in the longer term major industrial countries 1880 2001 i introduction the empirical role of money growth in the macroeconomy has been studied by many researchers using different data and methods the most prominent studies focusing on the quantity theory of money are those of friedman and schwartz 1963 1982 using data averaged over the phases of the business cycle in order to capture longer run movements with u s and u k data back to 1867 the study by mccandless and weber 2001 is a representative example for a different approach for 110 countries in the post wwii period longer run growth rates are approximated by growth of a variable over a 30 year period average growth rates 1 the problem with phase averaging is that it does not deal with possible nonstationarity of the data 2 the problem with growth averages over long periods while informative to a degree is that they have limitations too it is impossible to assess the timing of movements in these variables 3 in the frequency domain the long run is associated with frequency zero which in our terminology is the long run trend previous studies in the frequency domain on the long run neutrality of money at zero frequency include the studies of lucas 1980 and geweke 1986 the theory of spectral analysis provides a rigorous framework for extracting specific frequency bands from the data instead of considering only frequency zero stock and watson 1998 applied the band pass filter of baxter and king 1999 to extract cycles frequency bands for u s data and focused on the business cycle and on mostly the post wwii period christiano and fitzgerald 2003 proposed an improved band pass filter and provided an application to the longer run relation of money and inflation for bands of 8 20 years and 20 40 years in the united states from 1900 to 1997 4 the usefulness of monetary aggregates for conducting monetary policy has been seriously called into question because of the instability of money demand a prominent empirical study is that of estrella and mishkin 1997 recent mainstream new keynesian models have no explicit role for money woodford 2008 a contrasting view is that the longer term role of money is still of relevance for monetary policy the european central bank explicitly emphasizes a supporting role that monetary aggregates should play in order to provide an anchor for inflation expectations hafer haslag and jones 2007 issing 2006 king 2002 nelson 2003 christiano motto and rostagno 2007 provided a theoretical new keynesian model where inflation expectations lose their anchor unless money is monitored and reacted to also beck and wieland 2008 presented a new keynesian model where cross checking with money growth movements improves inflation control similarly assenmacher wesche and gerlach 2006 2007 found a significant role for a low frequency low pass filtered component of money in the empirical new keynesian phillips curve equation 5 in the spirit of friedman 1961 we use long time spans so that our results are unlikely to be because of a specific policy rule in place in a given period we have 122 years of annual data from 1880 to 2001 before the introduction of the euro in 2002 we have real gross domestic product gdp money and consumer price indices cpis with no gaps for 11 industrialized countries 6 the countries included in our study differ in such terms as their institutions fiscal and monetary policies and economic growth rates nonetheless at least in peace time they were similar in generally having comparatively free markets in which prices and interest rates were determined our aim is to apply analytic methods that are free from economic and statistical models as much as possible in order to explore empirical regularities or stylized facts in the data also the focus of our research is the longer run we employ band pass filters to pick out cycles from each time series that last 8 40 years that is the longer term component

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

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

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

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

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 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

does private security affect crime a test using state regulations as instruments private security is employed to deter criminals from attacking specific targets presumably not to produce general deterrence indeed private security generates negative spillovers as criminals su

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

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

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

bank suspension of convertibility abstract a banking panic occurs when depositors at all banks seek a large reduction in their deposit holdings suspension of convertibility of demand deposits into currency was the banking system s response to a banking panic when depositors are incompletely informed about the state of bank investments a panic can occur when depositors expect capital losses conditional on having observed noisy indicators of the state of bank investments banks with superior information about the investments can signal to depositors by suspending convertibility that continuation of the long term investments is mutually beneficial