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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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    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.
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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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