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Working Paper
Can't Pay or Won't Pay? Unemployment, Negative Equity, and Strategic Default
This paper exploits matched data from the PSID on borrower mortgages with income and demographic data to quantify the relative importance of negative equity, versus lack of ability to pay, as affecting default between 2009 and 2013. These data allow us to construct household budgets sets that provide better measures of ability to pay. We use instrumental variables to quantify the impact of ability to pay, including job loss and disability, versus negative equity. Changes in ability to pay have the largest estimated effects. Job loss has an equivalent effect on default likelihood as a 35 ...
Working Paper
Reducing Strategic Default in a Financial Crisis
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 ...