Abstract
In the presence of contract incompleteness and asymmetric information, liquidation policy plays an important role in financial contracting. Liquidation is a double-edged sword. It deters borrowers from defaulting strategically, but it could be harsh to borrowers experiencing short-term liquidity problems. This paper presents an experimental analysis of the impacts of (1) liquidation policy on borrowers’ incentive to engage in strategic default and (2) disclosure of credit history information on lending relationships and borrowers’ behaviors. We show that liquidation policy deters borrowers from defaulting strategically. The availability of credit information softens the liquidation policy when the equilibrium liquidation policy is relatively lenient and helps to reduce strategic defaults.
| Original language | English |
|---|---|
| Pages (from-to) | 526-542 |
| Number of pages | 17 |
| Journal | Journal of Economic Behavior and Organization |
| Volume | 158 |
| DOIs | |
| Publication status | Published - Feb 2019 |
| Externally published | Yes |
Bibliographical note
Publisher Copyright:© 2018 Elsevier B.V.
ASJC Scopus Subject Areas
- Economics and Econometrics
- Organizational Behavior and Human Resource Management
Keywords
- Credit history
- Lab experiments
- Liquidation policy
- Liquidity default
- Strategic default