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The cost of steering in financial markets: Evidence from the mortgage market

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  • Guiso, Luigi
  • Pozzi, Andrea
  • Tsoy, Anton
  • Gambacorta, Leonardo
  • Mistrulli, Paolo Emilio

Abstract

We build a model of the mortgage market in which banks attain their optimal mortgage portfolio by setting rates and steering customers. Sophisticated households know which mortgage type is best for them; naive households are susceptible to banks’ steering. Using data on the universe of Italian mortgages, we estimate the model and quantify the welfare implications of steering. The average cost of the distortion is equivalent to 16% of the annual mortgage payment. A financial literacy campaign is beneficial for naive households, but hurts sophisticated ones. Since steering also conveys information about mortgages, restricting steering might result in significant welfare losses.

Suggested Citation

  • Guiso, Luigi & Pozzi, Andrea & Tsoy, Anton & Gambacorta, Leonardo & Mistrulli, Paolo Emilio, 2022. "The cost of steering in financial markets: Evidence from the mortgage market," Journal of Financial Economics, Elsevier, vol. 143(3), pages 1209-1226.
    • Handle: RePEc:eee:jfinec:v:143:y:2022:i:3:p:1209-1226
    DOI: 10.1016/j.jfineco.2021.05.013
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    6. Francisco Gomes & Michael Haliassos & Tarun Ramadorai, 2021. "Household Finance," Journal of Economic Literature, American Economic Association, vol. 59(3), pages 919-1000, September.
    7. Matteo Benetton, 2021. "Leverage Regulation and Market Structure: A Structural Model of the U.K. Mortgage Market," Journal of Finance, American Finance Association, vol. 76(6), pages 2997-3053, December.
    8. Vivek Bhattacharya & Gastón Illanes & Manisha Padi, 2019. "Fiduciary Duty and the Market for Financial Advice," NBER Working Papers 25861, National Bureau of Economic Research, Inc.
    9. Mark Egan & Shan Ge & Johnny Tang, 2022. "Conflicting Interests and the Effect of Fiduciary Duty: Evidence from Variable Annuities," The Review of Financial Studies, Society for Financial Studies, vol. 35(12), pages 5334-5386.
    10. Fisher, Jack & Gavazza, Alessandro & Liu, Lu & Ramadorai, Tarun & Tripathy, Jagdish, 2024. "Refinancing cross-subsidies in the mortgage market," Journal of Financial Economics, Elsevier, vol. 158(C).
    11. Sarah Auster & Nicola Pavoni, 2018. "Optimal Delegation and Limited Awareness, with an Application to Financial Intermediation," BAFFI CAREFIN Working Papers 1869, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    12. Jason Allen & Robert Clark & Jean-François Houde & Shaoteng Li & Anna V. Trubnikova, 2023. "The Role of Intermediaries in Selection Markets: Evidence form Mortgage Lending," NBER Working Papers 31989, National Bureau of Economic Research, Inc.
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    15. Deuflhard, Florian, 2018. "Quantifying inertia in retail deposit markets," SAFE Working Paper Series 223, Leibniz Institute for Financial Research SAFE.
    16. Jonathan Gruber & Benjamin R. Handel & Samuel H. Kina & Jonathan T. Kolstad, 2020. "Managing Intelligence: Skilled Experts and AI in Markets for Complex Products," NBER Working Papers 27038, National Bureau of Economic Research, Inc.
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    More about this item

    Keywords

    Steering; Financial advice; Mortgage market; Consumer protection;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis

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