Essays on financial crisis.

University of Minnesota Ph.D. dissertation. July 2011. Major: Economics. Advisor: V. V. Chari. 1 computer file (PDF); vii, 54 pages, appendices A-B.This dissertation consists of two essays. The first essay studies theoretically the relationship between government bailouts and bank runs. There were widespread bank runs and government bailouts during the 2008 Financial Crisis. Immediately following the announcement of various bailout policies intended to prevent banking panics, bank run probabilities for some banks, as measured by various bank run indices, rose dramatically. An extreme example is the run on Northern Rock right after its bailout announcement. This paper develops a model of information based bank runs to analyze how the announcement of bailouts affects investors' bank run incentives. I consider an environment where the quality of a bank's asset is random, and both the government and investors obtain private signals of the asset quality after its realization. The government bails out the bank in the form of capital injection only if it perceives the bank is bad. The equilibrium probability of bank runs is uniquely determined. I conclude that before the announcement, the existence of such bailout policy reduces investors' bank run incentives, but after the announcement, investors may run on the bank, since such an announcement reflects the government's information about the bad bank asset. The announcement of bailouts will be more likely to trigger bank runs if the bailout amount is smaller, the government is better informed, or the government specifies the bank is worse. The second essay examines the effect of bank bailouts on the probability of bank runs empirically. I conduct event studies in which I use the stock price abnormal return as a proxy for the probability of a bank run. Consistent with my theory, I find that, the recipient unspecified announcement of TARP generated positive abnormal returns, but after the specified bailout announcements, banks displayed significant negative abnormal returns and the abnormal return was positively correlated with the bailout ratio