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Waiting to Default: The Value of Delay
Author(s) -
Kau James B.,
Kim Taewon
Publication year - 1994
Publication title -
real estate economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.064
H-Index - 61
eISSN - 1540-6229
pISSN - 1080-8620
DOI - 10.1111/1540-6229.00648
Subject(s) - default , value (mathematics) , economics , transaction cost , microeconomics , option value , database transaction , actuarial science , computer science , finance , machine learning , incentive , programming language
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.