Run Equilibria in a Model of Financial Intermediation

Todd Keister and Huberto Ennis

No 513, 2008 Meeting Papers from Society for Economic Dynamics

Abstract: We study the Green and Lin (JET, 2003) model of financial intermediation with two new features: traders may face a cost of contacting the intermediary and consumption needs may be correlated across traders. We show that each of these features is capable of generating an equilibrium in which some (but not all) traders "run" on the intermediary by withdrawing their funds at the first opportunity regardless of their true consumption needs. Our results also provide some insight into the elements of the economic environment that are necessary for a run equilibrium to exist in general models of financial intermediation. In particular, they highlight the importance of information frictions that cause the intermediary and traders to have different beliefs, in equilibrium, about the consumption needs of those traders who have yet to contact the intermediary.

Date: 2008
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Working Paper: Run equilibria in a model of financial intermediation (2008)
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