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Strategic Loan Defaults and Coordination: An Experimental Analysis

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  • Stefan Trautmann
  • Razvan Vlahu

Abstract

This paper experimentally studies the impact of uncertainty about bank and borrower fundamentals on loan repayment. We find that solvent borrowers are more likely to default strategically when stricter disclosure creates common knowledge about bank weakness. Borrowers are also less likely to repay in the presence of higher uncertainty regarding other. Borrowers' financial health, regardless of disclosure rules. We show that uncertainty about fundamentals changes the risk dominance properties of the coordination problem, and that these changes subsequently explain borrowers' default. For the individual borrower, loss aversion and negative past experiences reduce repayment, suggesting that bank failure can be contagious in times of distress.

Suggested Citation

  • Stefan Trautmann & Razvan Vlahu, 2011. "Strategic Loan Defaults and Coordination: An Experimental Analysis," DNB Working Papers 312, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:312
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    Cited by:

    1. repec:bis:bisifc:45-08 is not listed on IDEAS
    2. Brown, Martin & Trautmann, Stefan T. & Vlahu, Razvan, 2014. "Understanding bank-run contagion," Working Paper Series 1711, European Central Bank.
    3. Breaban, A.G., 2014. "Behavior and asset markets : Individual decisions, emotions and fundamental value trajectories," Other publications TiSEM a20e6a40-f15e-4331-83cb-c, Tilburg University, School of Economics and Management.
    4. Adriana Breaban & Charles N. Noussair, 2013. "Emotional State and Market Behavior," Working Papers 2013/08, Economics Department, Universitat Jaume I, Castellón (Spain).
    5. Lucks, Konstantin, 2016. "The Impact of Self-Control on Investment Decisions," MPRA Paper 73099, University Library of Munich, Germany.
    6. repec:eee:ecolet:v:162:y:2018:i:c:p:146-149 is not listed on IDEAS
    7. Kiss, Hubert Janos & Rodriguez-Lara, Ismael & Rosa-García, Alfonso, 2014. "Do social networks prevent or promote bank runs?," Journal of Economic Behavior & Organization, Elsevier, vol. 101(C), pages 87-99.
    8. Martin Dufwenberg, 2014. "Banking on Experiments?," Working Papers 534, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    9. Fabio Schiantarelli & Massimiliano Stacchini & Philip E. Strahan, 2016. "Bank Quality, Judicial Efficiency and Borrower Runs: Loan Repayment Delays in Italy," NBER Working Papers 22034, National Bureau of Economic Research, Inc.
    10. Connor, Gregory & Flavin, Thomas, 2015. "Strategic, unaffordability and dual-trigger default in the Irish mortgage market," Journal of Housing Economics, Elsevier, vol. 28(C), pages 59-75.
    11. Kiss, Hubert J. & Rodriguez-Lara, Ismael & Rosa-Garcia, Alfonso, 2018. "Panic bank runs," Economics Letters, Elsevier, vol. 162(C), pages 146-149.
      • Hubert Janos Kiss & Ismael Rodriguez-Lara & Alfonso Rosa-Garcia, 2017. "Panic bank runs," IEHAS Discussion Papers 1710, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.

    More about this item

    Keywords

    credit market; strategic default; loss aversion; risk dominance; transparency;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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