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The Cost of Distorted Financial Advice: Evidence from the Mortgage Market

Author

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

Abstract

Many households lack the sophistication required to make complex financial decisions and risk being exploited when seeking advice from intermediaries. We build a model of financial advice, in which banks attain their optimal mortgage portfolio by setting rates and providing advice to their clientele. �Sophisticated� households know which mortgage type is best for them; �naive� are susceptible to the bank's advice. Using data on the universe of Italian mortgages, we estimate the model and quantify the welfare implications of distorted financial advice. The average cost of the distortion is equivalent to an increase in the annual mortgage payment by 11%. However, since even distorted advice conveys information, banning advice altogether results in a loss of 998 euros per year on average. A financial literacy campaign is beneficial for naive households, but hurts sophisticated ones.

Suggested Citation

  • Gambacorta, Leonardo & Guiso, Luigi & Mistrulli, Paolo Emilio & Pozzi, Andrea & Tsoy, Anton, 2017. "The Cost of Distorted Financial Advice: Evidence from the Mortgage Market," CEPR Discussion Papers 12115, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12115
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    Cited by:

    1. Deuflhard, Florian, 2018. "Quantifying inertia in retail deposit markets," SAFE Working Paper Series 223, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.

    More about this item

    Keywords

    consumer protection; distorted financial advice; mortgage market;

    JEL classification:

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

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