Bank runs in the Diamond-Dybvig model

The Diamond-Dybvig model provides an explanation for: (1) the existence of banks as a risk sharing agreement between depositors against unexpected liquidity needs, (2) bank runs as an act of collective irrationality by rational depositors, and (3) the introduction of deposit insurance as an efficient mechanism to prevent bank runs. Extensions of the Diamond-Dybvig model deal with the panic explanation for bank runs, the consequences of open economies, and different solutions for preventing runs.