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Sequential Equilibrium and Competition in a Diamond-Dybvig Banking Model

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Author Info
Bernardino Adao (Departamento de Estudios Economicos, Banco de Portugal)
Ted Temzelides (Department of Economics, University of Iowa)

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Abstract

Within the framework of a Diamond-Dybvig model (1983), but with explicitly modelling the autarky choice during the planning period, we demonstrate that a mixed strategy bank run equilibrium that does not rely on sunspots may coexist with the sunspot run equilibrium previously studied in the literature. In a version of the model with multiple banks, there exist sequential equilibrium that imply positive results. However, the zero-profit contract in which runs never occur can be supported as the unique equilibrium outcome if the agents play pure strategies only and their beliefs are restricted to be consistent with a forward induction argument. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1006/redy.1998.0029
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Publisher Info
Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 1 (1998)
Issue (Month): 4 (October)
Pages: 859-877
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Handle: RePEc:red:issued:v:1:y:1998:i:4:p:859-877

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Find related papers by JEL classification:
C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages

References listed on IDEAS
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  1. Basu, Kaushik & Weibull, Jorgen W., 1991. "Strategy subsets closed under rational behavior," Economics Letters, Elsevier, vol. 36(2), pages 141-146, June. [Downloadable!] (restricted)
    Other versions:
  2. David M Kreps & Robert Wilson, 2003. "Sequential Equilibrium," Levine's Working Paper Archive 618897000000000813, UCLA Department of Economics. [Downloadable!]
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  3. Aumann, Robert J., 1974. "Subjectivity and correlation in randomized strategies," Journal of Mathematical Economics, Elsevier, vol. 1(1), pages 67-96, March. [Downloadable!] (restricted)
  4. Stephen Morris & Hyun Song Shin, 1995. "Informational events that trigger currency attacks," Working Papers 95-24, Federal Reserve Bank of Philadelphia.
  5. Edward J. Green & Ping Lin, 1996. "Implementing efficient allocations in a model of financial intermediation," Working Papers 576, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  6. Noeldecke,Georg & Samuelson,Larry, . "An evolutionary analysis of backward and forward induction," Discussion Paper Serie B 228, University of Bonn, Germany.
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  7. Cho, In-Koo & Kreps, David M, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 179-221, May. [Downloadable!] (restricted)
  8. Neil Wallace, 1988. "Another attempt to explain an illiquid banking system: the Diamond and Dybvig model with sequential service taken seriously," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 3-16. [Downloadable!]
  9. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23. [Downloadable!]
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  10. Gul, Faruk & Pearce, David G., 1996. "Forward Induction and Public Randomization," Journal of Economic Theory, Elsevier, vol. 70(1), pages 43-64, July. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Carlos Pimienta & Cristian Litan, 2008. "Conditions for equivalence between sequentiality and subgame perfection," Economic Theory, Springer, vol. 35(3), pages 539-553, June. [Downloadable!] (restricted)
  2. Michael Loewy, 2003. "``To Furnish an Elastic Currency'': Banking, Aggregate Risk, and Welfare," Topics in Macroeconomics, Berkeley Electronic Press, vol. 3(1), pages 1052-1052. [Downloadable!] (restricted)
  3. Guilherme Carmona, 2004. "On the Existence of Equilibrium Bank Runs in a Diamond-Dybvig Environment," Finance 0404009, EconWPA. [Downloadable!]
    Other versions:
  4. Todd R. Kaplan, . "Why Banks Should Keep Secrets," Working papers _005, University of Minnesota, Department of Economics. [Downloadable!]
  5. Carmona, Guilherme & Leoni, Patrick, 2003. "Equilibrium Non-Panic Bank Failures," FEUNL Working Paper Series wp424, Universidade Nova de Lisboa, Faculdade de Economia. [Downloadable!]
  6. J. Carlos Gonzalez-Pimienta & Cristian M. Litan, 2005. "On The Equivalence Between Subgame Perfection And Sequentiality," Economics Working Papers we052616, Universidad Carlos III, Departamento de Economía. [Downloadable!]
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