Strategic default with social interactions: a laboratory experiment

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2 Citations (Scopus)

Abstract

Purpose - The chapter studies strategic default using an experimental approach. Design/methodology/approach - The experiment considers a stochastic asset process and a loan with no down-payment. The treatments are two asset volatilities (high and low) and the absence and presence of social interactions via a direct effect on the subject's payoff. Findings - I demonstrate that (i) people appear to follow the prediction of the strategic default model quite closely in the high asset volatility treatment, and that (ii) incorporating social interactions delays the strategic default beyond what is considered optimal. Originality/value- The study tests adequately the strategic default using a novel experimental design and analyzes the neighbor's effect on that decision.

Original languageEnglish
Title of host publicationExperiments in Financial Economics
EditorsSean M. Collins, R. Mark Isaac, Douglas A. Norton
Place of PublicationBingley UK
PublisherEmerald Group Publishing Limited
Chapter3
Pages31-52
Number of pages22
ISBN (Electronic)9781783501410
ISBN (Print)9781783501403
DOIs
Publication statusPublished - 1 Jan 2013
Externally publishedYes

Publication series

NameResearch in Experimental Economics
PublisherEmerald Group Publishing Limited
Volume16
ISSN (Print)0193-2306

Keywords

  • Laboratory experiment
  • Optimal stopping
  • Real options

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