Information Acquisition in Rumor Based Bank Runs

Zhiguo He, Asaf Manela

NBER Working Paper No. 18513
Issued in November 2012, Revised in June 2014
NBER Program(s):Corporate Finance Program, Monetary Economics Program

We study information acquisition and dynamic withdrawal decisions when a spreading rumor exposes a solvent bank to a run. Uncertainty about the bank's liquidity and potential failure motivates depositors who hear the rumor to acquire additional noisy signals. Depositors with less informative signals may wait before gradually running on the bank, leading to an endogenous aggregate withdrawal speed and bank survival time. Private information acquisition about liquidity can subject solvent-but-illiquid banks to runs, and shorten the survival time of failing banks. Public provision of solvency information can mitigate runs by indirectly crowding-out individual depositors' effort to acquire liquidity information.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w18513

Published: Journal of Finance, Volume 71, Issue 3 June 2016 Pages 1113–1158 citation courtesy of

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