We examine how the possibility of a bank run affects the investment decisions made by a competitive bank. Cooper and Ross (1998, Bank runs: liquidity costs and investment distortions. Journal of Monetary Economics 41, 27–38) have shown that when the probability of a run is small, the bank will...

We examine how the possibility of a bank run affects the deposit contract offered and the investment decisions made by a competitive bank. Cooper and Ross (1998) have shown that when the probability of a run is small, the bank will offer a contract that admits a bank-run equilibrium. We show...