Should I default on my mortgage even if I can pay? Experimental evidence
View/ Open
Metadata
Show full item recordcomunitat-uji-handle:10234/9
comunitat-uji-handle2:10234/8643
comunitat-uji-handle3:10234/8644
comunitat-uji-handle4:
INVESTIGACIONMetadata
Title
Should I default on my mortgage even if I can pay? Experimental evidenceDate
2019-08-21Publisher
ElsevierBibliographic citation
PAVAN, Marina; BARREDA-TARRAZONA, Iván. Should I default on my mortgage even if I can pay? Experimental evidence. Journal of Economic Dynamics and Control, 2019, 103733.Type
info:eu-repo/semantics/articlePublisher version
https://www.sciencedirect.com/science/article/pii/S0165188919301320Version
info:eu-repo/semantics/acceptedVersionSubject
Abstract
We study strategic default in the laboratory, i.e., in a controlled experiment. Subjects are initially endowed with a house and a mortgage (we use neutral wording in the experiment), and must decide at each period in ... [+]
We study strategic default in the laboratory, i.e., in a controlled experiment. Subjects are initially endowed with a house and a mortgage (we use neutral wording in the experiment), and must decide at each period in which their mortgage is alive among three options: making the mortgage payment, selling the house, or walking away from their house and defaulting on their mortgage. At each point in time, we can observe whether defaulters can afford to make the mortgage payment, and thus, directly compute the number of strategic defaulters. Subjects default in the right periods and quite fast learn what they should consume. We find experimental support for the “double trigger” hypothesis: individuals faced with low income and low house prices are more likely to default. We observe that subjects default less than optimal, and this decision is significantly affected by social norm concerns in the context of the experiment. Individuals under-consume in the first periods of life: they are “cautious” when indebted. Both introducing a 50% probability of recourse and a Responsible Homeowner Reward are very effective in preventing default in the lab, especially by individuals receiving a bad shock to income when house prices are low. [-]
Investigation project
Spanish Ministry of Science, Innovation and University (RTI2018-096927-B-100 and ECO2015-68469-R); Generalitat Valenciana (AICO/2018/036andPROMETEO/2018/102); Jaume I University (P1.1B2015-76/77)Rights
© 2019 Elsevier B.V. All rights reserved.
http://rightsstatements.org/vocab/InC/1.0/
info:eu-repo/semantics/openAccess
http://rightsstatements.org/vocab/InC/1.0/
info:eu-repo/semantics/openAccess
This item appears in the folowing collection(s)
- ECO_Articles [696]