Bank Runs and Costly Information

In this paper, we model the deposit market with costly information on bank risks. The model adds to the volume of literature related to the Diamond-Dybvig model and related models of information-based bank runs. The inclusion of costly information signals indicates that depositors must decide whether to pay for information regarding changes in the riskiness of banking activities; these costs may involve, for instance, time and other resources needed to find and read financial information. We show that an efficient bank run is the only equilibrium even in case of non-negative information costs. To ensure the uniqueness of the efficient bank run equilibrium it is enough to lower the costs for at least one group of the depositors or introduce the deposit insurance system with co-insurance.