Consumers deposit their total saving, equaling the value of 1, at the bank at t = 0. The bank invests all deposit in an illiquid asset, yielding R = 1.5 in period 2 and has a liquidation value of 1 at period 1. Consumers have the probability of 25 percent of being impatient and consume in period 1. The remaining patient consumers want to consume in period 2. The bank offers r(1) = 1.10 and r(2) = 1.20 as payment to consumers who withdraw in period 1 and period 2 respectively. Suppose that consumers believe at period 1 that 70 percent of the consumers withdraw their deposits at period 1, will this believe trigger a bank run?

Consumers deposit their total saving, equaling the value of 1, at the bank at t = 0. The bank invests all deposit in an illiquid asset, yielding R = 1.5 in period 2 and has a liquidation value of 1 at period 1. Consumers have the probability of 25 percent of being impatient and consume in period 1. The remaining patient consumers want to consume in period 2. The bank offers r(1) = 1.10 and r(2) = 1.20 as payment to consumers who withdraw in period 1 and period 2 respectively. Suppose that consumers believe at period 1 that 70 percent of the consumers withdraw their deposits at period 1, will this believe trigger a bank run?

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter19: The Problem Of Adverse Selection

Section: Chapter Questions

Problem 7MC

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