Communication and group size on bank run games

Area of Science:

• Behavioral Economics
• Game Theory
• Financial Stability

Background:

• Bank runs pose significant systemic risks.
• Understanding factors influencing bank run dynamics is crucial for financial stability.
• Group size and communication are key variables in economic decision-making.

Purpose of the Study:

• To investigate the impact of communication and group size on bank run game outcomes.
• To analyze the effectiveness of different communication strategies (costless, cheap, costly) in mitigating bank runs.
• To compare the coordination challenges in two-player versus three-player bank run games.

Main Methods:

• Experimental economic games simulating bank run scenarios.
• Comparison of baseline (no communication) with various communication treatments.
• Analysis of strategic interactions and decision-making in repeated two-player and three-player games.

Main Results:

• Communication significantly enhances cooperation in two-player bank run games through learning effects.
• Coordination becomes substantially more difficult in three-player games due to increased complexity.
• Increasing communication costs reduce deception but do not fully resolve coordination issues in larger groups.

Conclusions:

• Communication is a less effective efficiency-enhancing mechanism in three-player bank run games compared to two-player games.
• Policymakers should prioritize increasing public transparency and confidence in banking systems to mitigate bank run risks.
• The complexity of decision-making in larger groups limits the efficacy of communication-based interventions.