Strategic loan defaults and coordination: An experimental analysis
Trautmann,S.T. Vlahu,R.
Trautmann,S.T.
Vlahu,R.
Abstract
This paper experimentally studies the impact of bank and borrower fundamentals on loan repayment. We find that solvent borrowers are more likely to default strategically when the bank’s expected strength is low, although loan repayment is a Pareto dominant Nash equilibrium. Borrowers are also less likely to repay when other borrowers’ expected repayment capacity is low, regardless of banks’ fundamentals. We show that changes in expectations about bank and borrower fundamentals change the risk dominance properties of the borrowers’ coordination problem, and that these changes subsequently explain strategic defaults. For the individual borrower, loss aversion and negative past experiences reduce repayment, suggesting that bank failure can be contagious in times of distress.
Description
Date
2013
Journal Title
Journal ISSN
Volume Title
Publisher
Research Projects
Organizational Units
Journal Issue
Keywords
SDG 10 - Reduced Inequalities
Citation
Trautmann, S T & Vlahu, R 2013, 'Strategic loan defaults and coordination : An experimental analysis', Journal of Banking & Finance, vol. 37, no. 3, pp. 747-760. https://doi.org/10.1016/j.jbankfin.2012.10.019
License
info:eu-repo/semantics/restrictedAccess