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Reducing Strategic Default in a Financial Crisis

Sumit Agarwal, Slava Mikhed, Barry Scholnick and Man Zhang ()
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No 21-36, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: We document that increasing penalties for default reduces strategic default in financial crises by exploiting the 2009 changes to Canadian consumer insolvency regulations. Our novelty is that the incentives from increasing penalties for default operate in the opposite direction from incentives in more typical financial crisis policy interventions, which increase the liquidity of debtors. We can identify strategic default because our policy intervention is independent of debtors’ liquidity and initial selection into long-term debt contracts. Our results imply that even insolvent debtors can be incentivized to reduce default during financial crises without the typical interventions, which increase debtors’ liquidity

Keywords: strategic default; financial crisis (search for similar items in EconPapers)
JEL-codes: G01 G21 G51 (search for similar items in EconPapers)
Pages: 59
Date: 2022-08-24
New Economics Papers: this item is included in nep-ban, nep-cfn and nep-rmg
Note: REVISED August 2022. Original paper was dated 11-08-2021
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DOI: 10.21799/frbp.wp.2021.36

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