Working Paper

Reducing Strategic Default in a Financial Crisis


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;

JEL Classification: G01; G21; G51;

https://doi.org/10.21799/frbp.wp.2021.36

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Bibliographic Information

Provider: Federal Reserve Bank of Philadelphia

Part of Series: Working Papers

Publication Date: 2021-11-08

Number: 21-36