Journal of Banking & Finance Vol. 32 No. 6 2008
Information acquisition, coordination, and fundamentals in a financial crisis
Abstract
This paper reconciles the two explanations of a financial crisis, the self-fulfilling prophecy and the fundamental causes, in an empirically-relevant framework, by explicitly modeling the costly voluntary acquisition of information about fundamentals in a variant of Diamond and Dybvig [Diamond, D., Dybvig, P., 1983. Bank runs, deposit insurance, and liquidity. Journal of Political Economy 91, 401–419]. The model exhibits strategic complementarity in information acquisition. In the “partial run” equilibrium investors engage in costly evaluation of projects, so that banks with lower-return projects fail. There also exist the classic “full-run” and “no-run” equilibria in which there is no project evaluation. Investors’ coordination on a specific equilibrium is triggered by a self-fulfilling prophecy. So, financial crises are seen as both fundamentals-based and self-fulfilling prophecies-based phenomena.
- DOI
- 10.1016/j.jbankfin.2007.04.031
- Volume
- 32
- Issue
- 6
- Pages
- 907-914
- Language
- en
- Sources
- openalex crossref bibtex:phds-export.bib