[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

INSTITUTIONS
In many situations, institutions ensure that a cooperative outcome is reached.
International organizations such as the World Trade Organization (WTO) serve to
enforce agreements that promote international trade. Member countries agree to
abide by certain rules that forbid the type of trade restrictions and beggar-thyneighbor
policies that proved so disastrous during the 1930s. Professional sports
leagues impose salary caps, which limit the ability of teams to boost salaries. Deposit
insurance eliminates the incentive for depositors to withdraw funds when there
are rumors of financial trouble at their bank, because they know their money is
protected even if their bank fails.
Case in Point
BANKING PANICS
Between 1930 and 1933, the United States suffered a massive financial panic that
forced about nine thousand banks to fail. This disruption of the financial system
contributed to the severity of the Great Depression, when unemployment reached
levels as high as 25 percent of the labor force. As banks closed their doors, businesses
that relied on bank credit to finance their inventories and investments were
forced to cut back production and lay off workers. How can game theory help us
understand why so many banks failed?
During the banking panics of the early 1930s, depositors rushed
to withdraw their savings, leading to many bank failures.
322 ∂ CHAPTER 14 STRATEGIC BEHAVIOR