Intervention With Screening in Panic-Based Runs

Policymakers frequently use guarantees to mitigate panic-based runs in the financial system. The authors analyze a binary-action coordination game under the global games framework and propose a novel intervention program that screens investors based on their heterogeneous beliefs about the system's stability. The program only attracts investors who are at the margin of running, and their participation boosts all investors' confidence in the financial system. Compared with government guarantee programs, the authors' proposed program is as effective at mitigating runs but features two advantages: it costs less to implement and it is robust to moral hazard.