Strategic Loan Defaults and Coordination: An Experimental Analysis

50 Pages Posted: 1 Nov 2011

See all articles by Stefan T. Trautmann

Stefan T. Trautmann

Heidelberg University - Alfred Weber Institute for Economics

Razvan Vlahu

Dutch Central Bank (De Nederlandsche Bank)

Multiple version iconThere are 3 versions of this paper

Date Written: August 1, 2011

Abstract

This paper experimentally studies the impact of uncertainty about bank and borrower fundamentals on loan repayment. We find that solvent borrowers are more likely to default strategically when stricter disclosure creates common knowledge about bank weakness. Borrowers are also less likely to repay in the presence of higher uncertainty regarding other. Borrowers’ financial health, regardless of disclosure rules. We show that uncertainty about fundamentals changes the risk dominance properties of the coordination problem, and that these changes subsequently explain borrowers’ default. For the individual borrower, loss aversion and negative past experiences reduce repayment, suggesting that bank failure can be contagious in times of distress.

Keywords: credit market, strategic default, loss aversion, risk dominance, transparency

JEL Classification: D81, G21, G28

Suggested Citation

Trautmann, Stefan T. and Vlahu, Razvan, Strategic Loan Defaults and Coordination: An Experimental Analysis (August 1, 2011). De Nederlandsche Bank Working Paper No. 312, Available at SSRN: https://ssrn.com/abstract=1951882 or http://dx.doi.org/10.2139/ssrn.1951882

Stefan T. Trautmann (Contact Author)

Heidelberg University - Alfred Weber Institute for Economics ( email )

Grabengasse 14
Heidelberg, D-69117
Germany

Razvan Vlahu

Dutch Central Bank (De Nederlandsche Bank) ( email )

P.O. Box 98
Amsterdam, 1000 AB
Netherlands

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
70
Abstract Views
1,012
Rank
306,387
PlumX Metrics