We report data from a laboratory experiment studying the behavioral mechanisms which contribute to the increase in strategic defaults during an economic crisis. In our experiment, subjects can default on an outstanding loan, but moral constraints and social norm enforcement may provide...

We report data from a laboratory experiment studying the behavioral mechanisms which contribute to the increase in strategic defaults during an economic crisis. In our experiment, subjects can default on an outstanding loan, but moral constraints and social norm enforcement may provide...

In a dynamic model of optimal bailouts, we show how borrower myopia affects the severity of debt crises. Myopic borrowers misprice the option to default with a U-shaped negative pricing error. The myopia discount changes the optimal bailout policy. Myopia gets punished when the distortions from...

We study whether a default option attached to non-recourse mortgages improves borrowers' surplus from mortgage financing. By defaulting on mortgage debt, borrowers can save their non-collateralized income from being foreclosed. In exchange, borrowers must forgo non-monetary surplus from...

From 2007 to 2009 U.S. house prices plunged and mortgage defaults surged. While ostensibly consistent with widespread “ruthless default,” analysis of detailed mortgage and house price data indicates that borrowers do not walk away until they are deeply underwater – far deeper than...