Strategic default with social interactions: A laboratory experiment

Abstract

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.