Vecon Lab Bank Run Experiment: Introduction

This program sets up an investment game in which each depositor chooses whether or not to withdraw cash from a financial institution. If withdrawals exceed the bank's cash reserves, the bank fails and earnings for those who have not withdrawn at that point are diminished. Those who withdraw prior to a failure will receive their deposits. If the bank does not fail, those who do not withdraw receive a return payoff that exceeds the initial deposit. There are both bank-run equilibria and non-bank-run equilibria. The chances of a bank run can be affected by return parameters, bank cash reserves, and deposit insurance.

The setup is based on a game developed by AJ Bostian and C. Holt for use with "clickers" in larege classes. With multiple banks, the simulation can illustrate how a banking crisis can spread quickly, and how the erosion of confidence is not always easily reversed by structural solutions like limited deposit insurance.

Vecon Lab - September 19, 2020