Question: Two investors (A and B) have each deposited $10,000 in a bank. The bank has invested these deposits in a long-term project. If the bank is forced to liquidate its investment before the project matures, only $16,000 can be recovered. If the bank allows the investment to reach maturity, the project will pay out a total of $24,000 and thus each investor will receive $12,000.

Consider the following strategic situation. Each investor has to decide (simultaneously and independently) whether or not to withdraw the money from the bank. If both investors decide to withdraw, then the bank has to liquidate the project before maturity and each investor gets only $8,000 back. If neither of them withdraws the money, the project reaches maturity and each one gets $12,000 back. If only one investor makes a withdrawal then the bank has to liquidate the project before maturity and that investor gets $10,000 and the other gets only $6,000.

1. Describe the strategic representation of the game.
2. How many Nash equilibria does the game have? Explain.
3. If both investors have information that the bank is in financial trouble, what would be the most reasonable prediction?
4. If there are many banks and depositors facing the same strategic situation and there are rumors that the financial system is in bad shape, what will be your prediction? Would your answer change if the Federal Reserve or Central Bank assures that all deposits are guaranteed? Briefly explain.

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