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Waiting to Default: The Value of Delay

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  • James B. Kau
  • Taewon Kim

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.

Suggested Citation

  • James B. Kau & Taewon Kim, 1994. "Waiting to Default: The Value of Delay," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 22(3), pages 539-551, September.
    • Handle: RePEc:bla:reesec:v:22:y:1994:i:3:p:539-551
    DOI: 10.1111/1540-6229.00648
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