Coordination and communication during bank runs

Abstract

We analyze the withdrawal behavior of bank depositors in times of economic crisis. In our experimental model, we do not impose restrictions on the number of times subjects can withdraw or redeposit money. Additionally, there is no specific order in which subjects decide, and therefore, subjects have a variety of possible strategic moves (e.g., waiting, reacting to others, contacting peers, etc.) that are also available in reality. The experiment supplements existing theoretical models and examines the influence of the possibility to communicate, the culture of subjects, deposit insurance and the liquidity of the bank in tense economic times. Communication helps to stabilize banks, whereas information about the worsening of economic conditions together with irrational behavior increase the incidence of withdrawals. Communication helps to slow down withdrawals. An increase in the liquidity problems of a bank and a larger share of deposits not secured by deposit insurance cause larger withdrawals.