Social Norms and Strategic Default
Series
School of Finance Working Paper Series
Type
working paper
Date Issued
2016-03-07
Author(s)
Abstract (De)
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.
Language
English
HSG Classification
contribution to scientific community
Publisher
SoF-HSG
Publisher place
St. Gallen
Number
2016/08
Pages
50
Eprints ID
247893
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16_08_Brown et al_Social Norms and Strategic Default.pdf
Size
643.68 KB
Format
Adobe PDF
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