Financial Literacy and Bank Runs: An Experimental Analysis

In this experimental study on the determinants of bank run, participants anonymously interact via an experimental bank deciding whether to withdraw or not their deposit. As in Diamond and Dybvig (1983), runs result from a fundamental coordination problem. We elicit subjects’ financial literacy and study whether revealing this information helps in solving the equilibrium coordination in such games with multiple equilibria. As a control we also use information about elicited general knowledge. Within the same framework, we let the bank size vary to investigate how it affects coordination on bank run. We find that, when no information is revealed, the likelihood of runs increases with bank size. Whereas, when information on financial literacy is revealed, the likelihood of runs increases in small and decreases in large banks. Our analyses also show that subjects react to information on financial literacy and general knowledge in a different way. Getting to know that a group has higher financial literacy reduces the probability of run. While, when information about general knowledge is revealed, risk aversion at group level becomes relevant and positively affects the probability of bank run. In all specifications, bank run occurrence is positively affected by short-run withdrawal history and by subjects’ experience.