Crisis? What crisis? Bank Stability, financial development and propaganda

Abstract

We study the interaction between bank depositors and their government. The government controls the media at least partially. Will a rational government feed depositors biased news about the economic outlook in the hope to avert a bank run? Our Bayesian persuasion model shows that it may be optimal for the government to bias the signal depositors receive about the economic outlook even if all agents are rational and have common priors about the economic outlook. The model predicts depositors with a biased signal are less likely to run on the bank and less likely to return to the bank after the crisis. Countries with more media freedom experience more banking crises and more financial development, in line with the theory. In August 1998 Russian depositors with more access to the relatively unbiased channel NTV were not more likely to run on the bank, but much more likely to return, in line with the hypothesis that the August 1998 crisis revealed differences in bias between NTV and other TV stations.