| 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
finance |
| 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 |
http://papers.ssrn.com/sol3/papers.cfm?abstract_id... |
| Depositing User |
Geraldine Frei-Böbel
|
| Date Deposited |
07 Mar 2016 14:40 |
| Last Modified |
20 Jul 2022 17:27 |
| URI: |
https://www.alexandria.unisg.ch/publications/247893 |
Social Norms and Strategic Default
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