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Strategic default with social interactions: A laboratory experiment

Jean Paul Rabanal

Experiments in Financial Economics

ISBN: 978-1-78350-140-3, eISBN: 978-1-78350-141-0

Publication date: 16 January 2014

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.

Keywords

Acknowledgements

Acknowledgments

I would like to thank Dan Friedman, Ryan Oprea, Ai-ru Cheng, James Pettit, Olga Rabanal, Alessandra Cassar, Nirvikar Singh, and Sean Tanoos, and seminar participants at UCSC, USF, Banxico, CREED at University of Amsterdam, Max Planck Institute of Economics, University of Munich, and VGSE at University of Vienna for their invaluable comments and support. This research was supported by funds granted by SIGFIRM at the University of California, Santa Cruz.

Citation

Rabanal, J.P. (2014), "Strategic default with social interactions: A laboratory experiment", Experiments in Financial Economics (Research in Experimental Economics, Vol. 16), Emerald Group Publishing Limited, Leeds, pp. 31-52. https://doi.org/10.1108/S0193-2306(2013)0000016003

Publisher

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Emerald Group Publishing Limited