Bank Runs as Coordination Failures: An Experimental Study

We use experimental methods to investigate what factors contribute to breakdowns in coordination among a bank’s depositors. Subjects in our experiment decide whether to leave their money deposited in a bank or withdraw it early; a bank run occurs when there are too many early withdrawals. We explore the effects of adding uncertainty about fundamental withdrawal demand and of changing the number of opportunities subjects have to withdraw. Our results show that (i) bank runs are rare when fundamental withdrawal demand is known but occur frequently when it is stochastic, and (ii) subjects are more likely to withdraw when given multiple opportunities to do so than when presented with a single decision. For the multiple-opportunity case, we evaluate individual withdrawal decisions according to a set of simple cutoff rules. We find that the cutoff rule corresponding to the payoff-dominant equilibrium of the game, which involves Bayesian updating of probabilities, explains subject behavior better than other rules. * Forthcoming in the Journal of Economic Behavior & Organization. We thank the staff of the CASSEL experimental laboratory for the use of their facility and for their assistance in running the experiments. We acknowledge the programming work of Raj Advani. We are also grateful to Kelly Bedard, Ted Bergstrom, Gary Charness, Sangeeta Pratap, Jon Sonstelie, participants at the 2004 Experimental and Behavioral Economics Workshop in Calgary and the 2005 World Congress of the Econometric Society in London, as well as the co-editor and two anonymous referees for helpful comments and suggestions. This work was funded by UC-MEXUSConacyt grant No. CN-02-77, and was completed while Keister was at the Instituto Tecnológico Autónomo de México (ITAM), whose support is gratefully acknowledged. The views expressed herein are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of New York or the Federal Reserve System.