Strategic Default in the Context of a Social Network: An Epidemiological Approach

Abstract

The paper examines the impact of social networks on strategic default behavior. Given the difficulties in empirically modeling this phenomenon, the paper takes a simulation approach, utilizing techniques from epidemiology. The concept is that ideas can travel through a population in the same manner that a disease does. Homeowners learn about strategic default either from their neighbors or from real estate “mavens” who provide information, or in some cases misinformation. The modeling indicates that in fragile markets, advice by those considered to be experts can result in a flood of strategic defaults, causing a contagious downward spiral of home prices and potentially a market collapse.