The Banks' Swan Song : How Asymmetric Information is Resolved with Bank Runs

Incomplete deposit contracts allowing bank runs resolve the asymmetric information problem and transform incomplete markets into complete ones. If bank runs occur, the two-dimensional information set resulting from two independent exogenous shocks is converted into a one-dimensional set, which leads uninformed agents to extrapolate asset prices with accuracy. If bank runs do not occur, then markets are seen as ``markets for lemons.'' Banks do not trade with informed agents, and thus no loss occurs due to asymmetric information. Regardless of the occurrence of bank runs, banking arrangements provide uninformed agents with superior allocation to that made by incomplete markets