Who withdraws first? Line formation during bank runs

Kiss, Hubert János, Rodriguez-Lara, Ismael and Rosa-Garcia, Alfonso ORCID: (2022) Who withdraws first? Line formation during bank runs. Journal of Banking & Finance, 140 . DOI 10.1016/j.jbankfin.2022.106491

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We study how lines form in front of banks. In our model, depositors choose first the level of effort to arrive early at the bank and then whether or not to withdraw their deposit. We argue that the informational environment (i.e., the possibility of observing the action of others) affects the emergence of bank runs and should, therefore, influence the line formation. We test this prediction experimentally. While the informational environment has no effect on the line formation when we look at the average level of effort, our findings suggest that the reasons to arrive early at the bank varies across informational environment. Thus, expectations on the occurrence of bank run are key to explain the level of effort when depositors cannot observe the action of others. In this setting, depositors who expect a run arrive early at the bank to withdraw their funds. If actions can be observed, however, those who expect a run arrive early at the bank to keep their funds deposited. Depending on the informational environment, there are other factors (e.g., irrationality of depositors or loss aversion) that also explain the behavior of depositors.

Item Type:Article
Uncontrolled Keywords:Bank run, Beliefs, Experimental economics, Line formation, Loss aversion, Observability
JEL classification:C91 - Design of Experiments: Laboratory, Individual
D90 - Intertemporal Choice: General
G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages
G40 - Behavioral Finance: General
J16 - Economics of Gender; Non-labor Discrimination
ID Code:7413
Deposited By: MTMT SWORD
Deposited On:20 May 2022 08:20
Last Modified:20 May 2022 08:20

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