Social Norms and Strategic Default

Details

Serval ID
serval:BIB_725206F42CE6
Type
Report: a report published by a school or other institution, usually numbered within a series.
Publication sub-type
Working paper: Working papers contain results presented by the author. Working papers aim to stimulate discussions between scientists with interested parties, they can also be the basis to publish articles in specialized journals
Collection
Publications
Institution
Title
Social Norms and Strategic Default
Author(s)
Brown M., Schmitz J., Zehnder C.
Institution details
Swiss Institute of Banking and Finance
Issued date
2016
Abstract
This paper studies the behavioral mechanisms underlying the increase in strategic defaults during an economic crisis. We report data from a laboratory experiment in which we exogenously vary the state of the economy. Our data reveal two main reasons for why an economic contraction adversely affects repayments. First, weak economic conditions seem to soften debtors' moral constraints. When surrounded by insolvency, solvent debtors become less hesitant to default strategically. Second, an economic downturn also undermines the enforcement of social repayment norms by peers. However, we find that the decrease in norm enforcement is not caused by a break-down of the repayment norm itself, but rather is a consequence of the additional informational uncertainty that weak economic conditions create. In a crisis peers are reluctant to sanction defaulters, because the risk of harming innocent debtors is higher.
Keywords
Strategic Default, Moral Constraints, Social Norms
Create date
19/10/2017 13:41
Last modification date
21/08/2019 5:18
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