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Diagnosing Consumer Confusion and Sub-Optimal Shopping Effort: Theory and Mortgage-Market Evidence

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  • Susan E. Woodward
  • Robert E. Hall

Abstract

Mortgage loans are leading examples of transactions where experts on one side of the market take advantage of consumers' lack of knowledge and experience. We study the compensation that borrowers pay to mortgage brokers for assistance from application to closing. Two findings support the conclusion that confused borrowers overpay for brokers' services: (1) A model of effective shopping shows that borrowers sacrifice at least $1,000 by shopping from too few brokers. (2) Borrowers who compensate their brokers with both cash and a commission from the lender pay twice as much as similar borrowers who pay no cash.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16007.

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Date of creation: May 2010
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Handle: RePEc:nbr:nberwo:16007

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  1. Ayres, Ian & Siegelman, Peter, 1995. "Race and Gender Discrimination in Bargaining for a New Car," American Economic Review, American Economic Association, vol. 85(3), pages 304-21, June.
  2. Marsha Courchane & David Nickerson, 1997. "Discrimination Resulting from Overage Practices," Journal of Financial Services Research, Springer, vol. 11(1), pages 133-151, February.
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Cited by:
  1. Greg Kaplan & Guido Menzio, 2014. "The Morphology of Price Dispersion," PIER Working Paper Archive 14-002, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  2. Justine S. Hastings & Ali Horta├žsu & Chad Syverson, 2013. "Advertising and Competition in Privatized Social Security: The Case of Mexico," NBER Working Papers 18881, National Bureau of Economic Research, Inc.
  3. Cheremukhin, Anton A. & Tutino, Antonella & Restrepo-Echavarria, Paulina, 2014. "A theory of targeted search," Working Papers 1402, Federal Reserve Bank of Dallas.

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