Sequential Equilibrium and Competition in a Diamond–Dybvig Banking Model
Authors: Adão B.1; Temzelides T.2
Source: Review of Economic Dynamics, Volume 1, Number 4, October 1998 , pp. 859-877(19)
Publisher: Academic Press
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Abstract:
Within the framework of a Diamond–Dybvig model [J. Polit. Econ. 91 (1983), 401–419], but with explicitly modelling the autarky choice during the planning period, we demonstrate that a mixed strategy bank run equilibrium that does not rely on sunspots may coexist with the sunspot run equilibrium previously studied in the literature. In a version of the model with multiple banks, there exist sequential equilibria that imply positive profits. However, the zero-profit contract in which runs never occur can be supported as the unique equilibrium outcome if the agents play pure strategies only and their beliefs are restricted to be consistennt with a forward induction argument. Journal of Economic Literature Classification Numbers: C72, G21 Copyright 1998 Academic Press.
Language: English
Document Type: Research article
Affiliations: 1: Departamento de Estudos Económicos, Banco de Portugal, Lisbon, 1150, Portugal 2: Department of Economics, University of Iowa, Iowa City, Iowa, 52242
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