Waiting to Default: The Value of Delay

Posted: 2 May 2000

See all articles by James B. Kau

James B. Kau

University of Georgia - Department of Insurance, Legal Studies, Real Estate

Taewon Kim

California State University, Los Angeles

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.

JEL Classification: G21

Suggested Citation

Kau, James B. and Kim, Taewon, Waiting to Default: The Value of Delay. JOURNAL OF THE AMERICAN REAL ESTATE AND URBAN ECONOMICS ASSOCIATION, Vol 22 No 3, Fall 1994, Available at SSRN: https://ssrn.com/abstract=5553

James B. Kau (Contact Author)

University of Georgia - Department of Insurance, Legal Studies, Real Estate ( email )

Athens, GA 30602-6254
United States
706-542-9110 (Phone)
706-542-4295 (Fax)

Taewon Kim

California State University, Los Angeles ( email )

5151 State University Dr
Los Angeles, CA 90032
United States

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