Can Bank Runs Be Prevented by Bail-In Mechanisms? An Experimental Analysis

We run a laboratory experiment to study the effectiveness of two bail-in devices: stability funds that automatically limit depositors' possibility of withdrawing their assets, and individual insurance against the risk of default. We also vary the coverage that either mechanism permits. Depositors start the interaction with a monetary endowment deposited in a bank. They can then withdraw money before and after the bank suffers a liquidity loss. The bank defaults if desired withdrawals exceed available liquidity. Our results show that the only effective mechanism in reducing bank defaults, compared to baseline, is the stability fund with high coverage. When groups have a high share of female depositors, there is significant reduction in the likelihood of bank runs, which can be explained by women's higher propensity to buy insurance. When a critical liquidity signal is issued, women's lower propensity to withdraw disappears, bringing it to levels similar to that of men