Information Acquisition in Rumor-Based Bank Runs

We study information acquisition and withdrawal decisions when a liquidity event triggers a spreading rumor and exposes a bank to a run. Uncertainty about the bank’s liquidity and potential failure motivates agents who hear the rumor to acquire additional signals. Depositors with unfavorable signals may wait and thus gradually run on the bank, leading to an endogenous aggregate withdrawal speed. A bank run equilibrium exists when agents aggressively acquire information. We study threshold parameters (e.g. liquidity reserve and deposit insurance) that eliminate runs. Public provision of solvency information can eliminate runs by indirectly crowding-out individual depositors ’ effort to acquire liquidity information. However, providing too much information that slightly differentiates competing solvent-but-illiquid banks can result in inefficient runs. JEL Classification: D8, G