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The Contagion Effect of Neighboring ForeclosuresCharles ToweUniversity of Maryland - Department of Agricultural and Resource Economics and the National Center for Smart Growth Chad LawleyUniversity of Manitoba - Department of Agribusiness and Agricultural Economics May 7, 2011 Abstract: We examine the contagion effect of residential foreclosures and find strong evidence of a social interactions influence on default decisions where the interaction is based on neighbors’ behavior in a previous period. Using a unique spatially explicit parcel level data set documenting residential foreclosures in Maryland for the years 2006-2009 and a highly localized neighborhood definition, based on 13 nearest neighbors, we find that a neighbor in foreclosure increases the hazard of additional defaults by as much as 28%. This feedback effect goes beyond a temporary reduction in local house prices and implies a negative social multiplier effect of foreclosures.
Number of Pages in PDF File: 41 Keywords: Social Interaction, Foreclosure, Hazard model, Spillovers JEL Classification: C31, R31, G01 working papers seriesDate posted: May 31, 2011Suggested CitationContact Information
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