Teaching bank runs with classroom experiments

Author's pre-print draft dated January 15, 2009 deposited in SSRN archive. Final version published by Routledge; available online at http://www.tandfonline.com/Once relegated to cinema or history lectures, bank runs have become a modern phenomenon that captures the interest of students. In this article, the authors explain a simple classroom experiment based on the Diamond-Dybvig model (1983) to demonstrate how a bank run—a seemingly irrational event—can occur rationally. They then present possible topics for discussion including various ways to prevent bank runs and moral hazard