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On the Effects of Deposit Insurance and Observability on Bank Runs: An Experimental Study

Authors

  • HUBERT JANOS KISS,

    1. Hubert Janos Kiss is at the Department of Economics, Eötvös Loránd University, Hungary. He is also an Affiliate Fellow at CERGE-EI, Prague. (E-mail: hubert.kiss@tatk.elte.hu). Ismael Rodriguez-Lara is at ERI-CES, Departamento de Análisis Económico, Universidad de Valencia, Valencia, España. He is also an Affiliate Fellow at LUISS Guido Carlo University, Rome (E-mail: Ismael.Rodriguez@uv.es). Alfonso Rosa-García is a Dpto. de Fundamentos del Análisis Económico, Facultad de Economía y Empresa, Universidad de Murcia, Murcia (E-mail: alfonso.rosa@um.es).
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  • ISMAEL RODRIGUEZ-LARA,

    1. Hubert Janos Kiss is at the Department of Economics, Eötvös Loránd University, Hungary. He is also an Affiliate Fellow at CERGE-EI, Prague. (E-mail: hubert.kiss@tatk.elte.hu). Ismael Rodriguez-Lara is at ERI-CES, Departamento de Análisis Económico, Universidad de Valencia, Valencia, España. He is also an Affiliate Fellow at LUISS Guido Carlo University, Rome (E-mail: Ismael.Rodriguez@uv.es). Alfonso Rosa-García is a Dpto. de Fundamentos del Análisis Económico, Facultad de Economía y Empresa, Universidad de Murcia, Murcia (E-mail: alfonso.rosa@um.es).
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  • ALFONSO ROSA-GARCÍA

    1. Hubert Janos Kiss is at the Department of Economics, Eötvös Loránd University, Hungary. He is also an Affiliate Fellow at CERGE-EI, Prague. (E-mail: hubert.kiss@tatk.elte.hu). Ismael Rodriguez-Lara is at ERI-CES, Departamento de Análisis Económico, Universidad de Valencia, Valencia, España. He is also an Affiliate Fellow at LUISS Guido Carlo University, Rome (E-mail: Ismael.Rodriguez@uv.es). Alfonso Rosa-García is a Dpto. de Fundamentos del Análisis Económico, Facultad de Economía y Empresa, Universidad de Murcia, Murcia (E-mail: alfonso.rosa@um.es).
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  • We are indebted to Luis Moreno-Garrido for his contribution to the experimental design. We would also like to thank Coralio Ballester, Lola Collado, Jaromir Kovarik, Juan Carlos Negrete, Giovanni Ponti, and Agnes Pinter for helpful comments and to the editor in charge, Robert DeYoung, whose detailed comments helped us to improve the quality of the manuscript and to shape the exposition. Finally, this paper has benefitted from suggestions provided by participants of the XXXV Simposio Asociación Economía Española (SAEe), the III M-BEES in Maastricht, and the 2011 ESA European Conference in Luxembourg. Financial support from Spanish Ministry of Education and Science (SEJ2007-62656) and the Instituto Valenciano de Investigaciones Económicas (IVIE) is gratefully acknowledged. The authors kindly acknowledge financial support from the MNB (Central Bank of Hungary) and the Spanish Ministry of Science and Innovation under the projects ECO 2008-00510 (Hubert Janos Kiss) and ECO2010-19830 (Alfonso Rosa-García).

Abstract

We study the effects of deposit insurance and observability of previous actions on the emergence of bank runs by means of a controlled laboratory experiment. We consider three depositors in the line of a bank, who decide between withdrawing or keeping their money deposited. We have three treatments with different levels of deposit insurance which reflect the losses a depositor may incur in the case of a bank run. We find that different levels of deposit insurance and the possibility of observing other depositors’ actions affect the likelihood of bank runs. When decisions are not observable, higher levels of deposit insurance decrease the probability of bank runs. When decisions are observable, this need not to be the case. These results suggest that (i) observability might be considered as a partial substitute of deposit insurance and (ii) the optimal deposit insurance should take into account the degree of observability.

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