Bank runs as coordination failures: An experimental study

Abstract

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.