Coordination failure in experimental banks of different sizes

Abstract

We run a laboratory experiment to investigate how group size affects coordination in a bank-run game, in which participants choose simultaneously whether to withdraw or not and group members change over time. We find that bank size significantly affects the individual withdrawal probability, which is on average 12% higher in large than in small banks. In the initial round(s), all groups exhibit a similar withdrawal rate of about 40%; then, large and medium banks converge to the bank-run equilibrium, while small banks exhibit no systematic convergence. In all banks, experience and beliefs significantly affect the probability to withdraw and to experiment, i.e., to take in the current round the decision opposite to what was the best response in the previous one. We show that experimentation is a strategic choice, and interpret it as an attempt at promoting group convergence towards the efficient equilibrium.