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Hidden Costs of Hidden Debt

Author

Listed:
  • Johan Almenberg
  • Artashes Karapetyan

Abstract

We argue that salience—the extent to which a cost is visible and difficult to ignore—may have economically significant effects on homeowners’ borrowing behavior, through a bias toward less salient but more expensive loans. We first use a simple model to show that the presence of some biased consumers in the market will affect equilibrium prices. Next, we show that market data support the predictions of the model. We conduct several robustness checks to address unobserved heterogeneity. The observed effect is large. We finally report a survey evidence consistent with this bias.

Suggested Citation

  • Johan Almenberg & Artashes Karapetyan, 2014. "Hidden Costs of Hidden Debt," Review of Finance, European Finance Association, vol. 18(6), pages 2247-2281.
    • Handle: RePEc:oup:revfin:v:18:y:2014:i:6:p:2247-2281.
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    File URL: http://hdl.handle.net/10.1093/rof/rft053
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    Cited by:

    1. Cristian Badarinza & John Y. Campbell & Tarun Ramadorai, 2016. "International Comparative Household Finance," Annual Review of Economics, Annual Reviews, vol. 8(1), pages 111-144, October.
    2. Sumit Agarwal & Artashes Karapetyan, 2022. "Information Salience and Mispricing in Housing," Management Science, INFORMS, vol. 68(12), pages 9082-9106, December.
    3. Nguyen, Ha & Duncan, Alan, 2015. "Macroeconomic fluctuations in home countries and immigrants’ well-being: New evidence from Down Under," MPRA Paper 69593, University Library of Munich, Germany, revised Feb 2016.
    4. Olivier Mesly & Hareesh Mavoori & Nicolas Huck, 2023. "The Role of Financial Spinning, Learning, and Predation in Market Failure," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 14(1), pages 517-543, March.
    5. Karapetyan, A. & Kværner, Jens & Rohrer, Maximilian, 2024. "Inefficient regulation: Mortgages versus total credit," Other publications TiSEM f1611bef-5be9-46fc-8a3e-1, Tilburg University, School of Economics and Management.

    More about this item

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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