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Consumer mistakes and advertising: The case of mortgage refinancing

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  • Serafin Grundl

    (Federal Reserve Board)

  • You Suk Kim

    (Federal Reserve Board)

Abstract

Does advertising help consumers to find the products they need or push them to buy products they don’t need? In this paper we study the heterogeneous effects of advertising on consumer mistakes in the market for mortgage refinancing and quantify the resulting overall effect on the net present value of mortgage debt. Mortgage borrowers frequently make costly refinancing mistakes by either refinancing when they should wait, or by waiting when they should refinance. We assemble a novel data set that combines a borrower’s exposure to direct mail refinance advertising and their subsequent refinancing decisions. Even though borrowers would lose on average $1229 by refinancing, the average monthly exposure of 0.13 refinancing direct mail advertisements reduces the expected net present value of mortgage payments on average by $7 each month, because borrowers who should refinance are targeted by advertisers and more responsive to advertising. A counterfactual advertising policy that redirects all advertising to borrowers who should refinance would increase the gain in borrower welfare to $36.

Suggested Citation

  • Serafin Grundl & You Suk Kim, 2019. "Consumer mistakes and advertising: The case of mortgage refinancing," Quantitative Marketing and Economics (QME), Springer, vol. 17(2), pages 161-213, June.
    • Handle: RePEc:kap:qmktec:v:17:y:2019:i:2:d:10.1007_s11129-018-9207-3
    DOI: 10.1007/s11129-018-9207-3
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    3. 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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    More about this item

    Keywords

    Advertising; Mistakes; Mortgage; Refinancing;
    All these keywords.

    JEL classification:

    • M37 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Advertising
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance

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