Title: Market Liquidity and Creditor Runs: Feedback, Amplication, and Multiplicity


abstract:
In the global games framework, this paper studies bank runs in a financial system, in which there are many banks and they share a common asset market. Our model 1) endogenizes market liquidity, 2) demonstrates two-way feedback between market liquidity and creditor runs, and 3) shows the possibility of multiple equilibria in the system: even when the precision of creditors’
private signals approaches infinity, multiple equilibria (i.e., a self-fulflling systemic crisis) can still emerge. Our model helps explain amplication and multiplicity in financial crises.

Keywords: Systemic crises, bank runs, strategic complementarities, equilibrium multiplicity


Please discuss: in the fully-revealing setting (\[\sigma_s\to 0\]), why not use \[s_i^h = \theta_i\] to avoid messing up with the indifference condition ?