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The Diamond–Dybvig model of bank runs as a coordination game
Mälardalen University, School of Education, Culture and Communication.
2016 (English)Independent thesis Basic level (degree of Bachelor), 10 credits / 15 HE creditsStudent thesis
Abstract [en]

A bank run occurs when a large number of customers withdraw their deposits from a

financial institution at the same time. This can destabilise the bank to the point where it runs

out of cash and thus faces sudden bankruptcy. As more people withdraw their deposits, the

likelihood of bankruptcy increases, thus triggering further withdrawals. In game theory this

type of situation can be modelled as a “coordination game”, that is, a game with two pure

equilibria: If sufficiently many people keep their money in the bank, then it will not default

and it is rational for everyone to keep their money in the bank. On the other hand, if sufficiently

many people withdraw their deposits the bank will default and it is then rational for everyone

to try to withdraw their deposits.

The overall objective of this study is to explain the phenomenon of bank runs by introducing

the Diamond–Dybvig model. This model assumes that the function of a bank is to

offer both long-term loans for investments and relatively short-term deposit service. Bank

runs comes out as one of two equilibria when too many withdraw early before the long-term

loans is paid back. Our task is to find out the condition that can lead to bank runs and more

importantly, we will suggest two ways to address the problem of bank runs.

Place, publisher, year, edition, pages
2016. , p. 28
Keywords [en]
bank runs, coordination games
National Category
Mathematical Analysis
Identifiers
URN: urn:nbn:se:mdh:diva-32291OAI: oai:DiVA.org:mdh-32291DiVA, id: diva2:945413
Subject / course
Mathematics/Applied Mathematics
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Examiners
Available from: 2020-07-09 Created: 2016-07-01 Last updated: 2020-07-09Bibliographically approved

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CiteExportLink to record
Permanent link

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Cite
Citation style
  • apa
  • ieee
  • modern-language-association-8th-edition
  • vancouver
  • Other style
More styles
Language
  • de-DE
  • en-GB
  • en-US
  • fi-FI
  • nn-NO
  • nn-NB
  • sv-SE
  • Other locale
More languages
Output format
  • html
  • text
  • asciidoc
  • rtf