Endogenous Leverage and Default in the Laboratory

Marco Cipriani, Ana Fostel and Daniel Houser

No 26469, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study default and endogenous leverage in the laboratory. To this purpose, we develop a general equilibrium model of collateralized borrowing amenable to laboratory implementation and gather experimental data. In the model, leverage is endogenous: agents choose how much to borrow using a risky asset as collateral, and there are no ad-hoc collateral constraints. When the risky asset is financial, namely, its payoff does not depend on ownership (such as a bonds), collateral requirements are high and there is no default. In contrast, when the risky asset is non-financial, namely, its payoff depends on ownership (such as a firm), collateral requirements are lower and default occurs. The experimental outcomes are in line with the theory's main predictions. The type of collateral, whether financial or not, matters. Default rates and loss from default are higher when the risky asset is non-financial, stemming from laxer collateral requirements. Default rates and collateral requirements are closer to the theoretical predictions as the experiment progresses.

JEL-codes: A10 C90 D52 D53 G10 (search for similar items in EconPapers)
Date: 2019-11
New Economics Papers: this item is included in nep-dge, nep-exp and nep-ore
Note: AP IFM ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.nber.org/papers/w26469.pdf (application/pdf)

Related works:
Working Paper: Endogenous Leverage and Default in the Laboratory (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:26469

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w26469

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().