Social Norms and Strategic Default

Item Type Monograph (Working Paper)
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.
Authors Brown, Martin; Schmitz, Jan & Zehnder, Christian
Language English
Subjects economics
HSG Classification contribution to scientific community
Date 7 March 2016
Publisher SoF-HSG
Place of Publication St. Gallen
Series Name School of Finance Working Paper Series
Number 2016/08
Number of Pages 50
Official URL
Depositing User Geraldine Frei-Böbel
Date Deposited 07 Mar 2016 14:40
Last Modified 20 Jul 2022 17:27


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Brown, Martin; Schmitz, Jan & Zehnder, Christian: Social Norms and Strategic Default. School of Finance Working Paper Series, 2016, 2016/08.

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