This paper studies endogenous liquidity crises as the result of information panics. Collective ignorance is welfare maximizing but it is fragile, susceptible to self-fulfilling fears about asymmetric information. When investors become worried about the potential of adverse selection, they raise...

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...