Waiting to Default: The Value of Delay |
| |
Authors: | James B Kau Taewon Kim |
| |
Institution: | University of Georgia, Athens, Georgia 30602;California State University at Los Angeles, California 90032 |
| |
Abstract: | This paper analyzes the opportunity for early termination of a mortgage contract. We consider the possibility of defaulting on the property and explore the rules that are used by a value-maximizing borrower in exercising this option to default. The discussion centers on the value of waiting to make such a decision and the consequences of this rational inertia. We show that the observed delay in default usually attributed to transaction costs can instead be explained as entirely rational choice in a dynamic environment. |
| |
Keywords: | |
|
|