Teaching Bank Runs with Classroom Experiments

Abstract

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.

Keywords: Bank Runs, Classroom Experiments, Multiple Equilibria

JEL Classification: C9, G2