Teaching Bank Runs with Classroom Experiments

Dieter Balkenborg, Todd Kaplan, Timothy Miller
2011 Journal of Economic Education  
Once relegated to cinema or history lectures, bank runs have become a modern phenomenon that captures the interest of students. We use a simple classroom experiment based upon the Diamond-Dybvig Model (1983) to demonstrate how a bank run, a seemingly irrational event, can occur rationally. We then present possible topics for discussion including various ways to prevent bank runs and moral hazard. Description and Analysis of the Diamond-Dybvig Model Our experiment is based upon the
more » ... n the Diamond-Dybvig model (1983), which captures several elements of what a bank does. Our experiment focuses on the conversion of long-term loans (mortgages) into short-term deposits.
doi:10.1080/00220485.2011.581936 fatcat:vbxcvugeanfe7cx7mjkh6n7fva