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

  • Susan E. Woodward
  • Robert E. Hall

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: (i ) A model of effective shopping shows that borrowers sacrifice at least $1,000 by shopping from too few brokers. (ii ) 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. (JEL D12, D14, G21)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.7.3249
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File URL: http://www.aeaweb.org/aer/data/dec2012/20100555_data.zip
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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 102 (2012)
Issue (Month): 7 (December)
Pages: 3249-76

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Handle: RePEc:aea:aecrev:v:102:y:2012:i:7:p:3249-76
Note: DOI: 10.1257/aer.102.7.3249
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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.
  3. Antje Berndt & Burton Hollifield & Patrik Sandås, 2010. "The Role of Mortgage Brokers in the Subprime Crisis," NBER Working Papers 16175, National Bureau of Economic Research, Inc.
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