Running for the Exit: Community Cohesion and Bank Panics

TitleRunning for the Exit: Community Cohesion and Bank Panics
Publication TypeJournal Article
Year of Publication2014
AuthorsGreve HR, Kim J-Y
JournalOrganization Science
Volume25
Issue1
Pagination204-221
Date PublishedJan-Feb
Type of ArticleArticle
ISBN Number1047-7039
Accession NumberWOS:000329979200011
Keywordsamerica, bank panic, bank run, collective action, community diversity, contagion, demographic, diffusion, distrust, great-depression, heterogeneity, information, information diffusion, INSURANCE, market, organizational foundings, us commercial banking
Abstract

Bank panics attract scholarly interest because they reflect distrust of each bank that experiences a run as a result of diffusion of information; rumors about such bank runs trigger additional runs elsewhere. However, the contagion of bank runs is highly selective for reasons that are unrelated to the financial strength of the individual banks. This presents a puzzle that extant theories on institutions and reputations cannot fully explain. To solve this puzzle, we turn to the characteristics of the community in which the banks operate. We develop theory on how communities with diverse affiliation structures and economic inequality have weaker community cohesion and communication, making such communities less likely to experience widespread distrust and hence bank runs. We test hypotheses on the effects of community ethnic diversity, national origin diversity, religious diversity, and wealth inequality using data from the great bank panic of 1893, and we find strong community effects on bank runs. These findings suggest that the contagion of distrust in organizations following adverse events is channeled by community differences as well as organizational differences.

DOI10.1287/orsc.2013.0825