Research Seminars & Workshops @ IRES
Dr Jan Schmitz
Assistant Professor, ETH in Zurich, Switzerland
Social Norms and Strategic Default
A significant share of the mortgage defaults in the U.S. during the 2007-2009 crisis were strategic. Survey evidence suggests that the increased propensity to default strategically was partly driven by a breakdown in moral constraints and social norms to repay loans. In this paper we use experimental methods to shed new light on the behavioral mechanisms underlying the increased tendency to default strategically in an economic crisis. Our experiment isolates two important channels: First, adverse economic conditions soften moral constraints. When economic shocks cause fundamental defaults to surrounding borrowers solvent households feel less bad if they default strategically. Second, an economic contraction weakens the enforcement of social norms to repay debt: In a crisis, peers of defaulting households have a hard time distinguishing between strategic and fundamental defaults and are therefore reluctant to punish defaulting households. An economic downturn does not lead to a break-down of social norms per se, but rather creates informational uncertainty which makes it difficult to enforce the norm.
About the Speaker
Dr Jan Schmitz obtained his Ph.D. from the University of Hamburg, Germany in 2013. After that, he joined the University of Lausanne, Switzerland as a postdoc and he is now an assistant professor at the ETH in Zurich, Switzerland. He use economic experiments (in the laboratory and in the field) to study pro social behavior in different areas of decision making e.g., financial decisions that hurt others, voluntary public good provision and tax evasion.