Strategic Loan Defaults and Coordination: An Experimental Analysis
50 Pages Posted: 1 Nov 2011
There are 3 versions of this paper
Strategic Loan Defaults and Coordination: An Experimental Analysis
Strategic Loan Defaults and Coordination: An Experimental Analysis
Strategic Loan Defaults and Coordination: An Experimental Analysis
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: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
On the Dynamics and Severity of Bank Runs: An Experimental Study
By Andrew Schotter and Tanju Yorulmazer
-
By Ernst Fehr and Christian Zehnder
-
Strategic Loan Defaults and Coordination: An Experimental Analysis
By Stefan T. Trautmann and Razvan Vlahu
-
Strategic Loan Defaults and Coordination: An Experimental Analysis
By Stefan T. Trautmann and Razvan Vlahu
-
Do Social Networks Prevent Bank Runs?
By Hubert Janos Kiss, Ismael Rodriguez-lara, ...
-
On the Effects of Deposit Insurance and Observability on Bank Runs: An Experimental Study
By Hubert Janos Kiss, Ismael Rodriguez-lara, ...
-
Contagious Bank Runs: Experimental Evidence
By Martin Brown, Stefan T. Trautmann, ...