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The Cost of Steering in Financial Markets: Evidence from the Mortgage Market

Author

Listed:
  • Leonardo Gambacorta

    (Bank for International Settlements and CEPR)

  • Luigi Guiso

    (EIEF and CEPR)

  • Paolo Emilio Mistrulli

    (Bank of Italy)

  • Andrea Pozzi

    (EIEF and CEPR)

  • Anton Tsoy

    (Bank of Italy)

Abstract

We build a model of the mortgage market where banks attain their optimal mortgage portfolio by setting rates and “steering” customers. “Sophisticated” households know which mortgage type is best for them, while “naïve” ones are susceptible to steering by their banks. Using data on the universe of Italian mortgages, we estimate the model and quantify the welfare implications of steering. The analysis shows that banks’ steering activity could generate distortions, with welfare effects that vary between households depending on their degree of sophistication. However, the introduction of measures to restrict the scope for banks to steer their customers would not necessarily increase household welfare, because such activities, even if potentially distortive, may also contain useful information. By contrast, a financial literacy campaign always has a beneficial effect on the welfare of naïve households, which are proportionately more exposed to the risk of taking inappropriate financial decisions.

Suggested Citation

  • Leonardo Gambacorta & Luigi Guiso & Paolo Emilio Mistrulli & Andrea Pozzi & Anton Tsoy, 2019. "The Cost of Steering in Financial Markets: Evidence from the Mortgage Market," Temi di discussione (Economic working papers) 1252, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_1252_19
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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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