Communication and group size on bank run games

Abstract

This study examines the impact of communication and group size on bank run games, with a strategic focus on three-player games. In the baseline treatment group, communication is not allowed in two-player and three-player games. The main treatment consists of costless communication, cheap communication, and costly communication. The sender's action becomes more predictable with the increasing communication costs due to a lack of incentives to deceive. We find that in the non-cooperative, two-player bank run game, communication fosters cooperative behavior with the learning effect in the repeated interaction. However, coordination is far more difficult to achieve with Nash Pareto dominant equilibrium in three-player games due to its complexity in decision-making in larger groups. The ultimate result presents the limitation of communication as an efficiency-enhancing mechanism. A public recommendation is that policymakers should increase public transparency and ensure public confidence in banking systems to mitigate the risks and uncertainty of bank runs. In sum, the study presents the following:•In a three-player bank run game, communication is less effective than in a two-player scenario.•Policymakers should ensure public confidence and increase public transparency of banking systems.