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Consumer Mistakes and Advertising : The Case of Mortgage Refinancing

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  • Grundl, Serafin J.
  • Kim, You Suk

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 effects of advertising on consumer mistakes and quantify the resulting effect on consumer welfare in the market for mortgage refinancing. 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 on average borrowers would lose approximately $500 by refinancing, the average monthly exposure of 0.23 refinancing advertisements reduces the expected net present value of mortgage payments on average by $13, 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 $45.

Suggested Citation

  • Grundl, Serafin J. & Kim, You Suk, 2017. "Consumer Mistakes and Advertising : The Case of Mortgage Refinancing," Finance and Economics Discussion Series 2017-067, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2017-67
    DOI: 10.17016/FEDS.2017.067
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    File URL: https://www.federalreserve.gov/econres/feds/files/2017067pap.pdf
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    References listed on IDEAS

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    1. Nichols, Len M, 1985. "Advertising and Economic Welfare," American Economic Review, American Economic Association, vol. 75(1), pages 213-218, March.
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    3. Aizawa, Naoki & Kim, You Suk, 2015. "Advertising and Risk Selection in Health Insurance Markets," Finance and Economics Discussion Series 2015-101, Board of Governors of the Federal Reserve System (U.S.).
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    5. Umit G. Gurun & Gregor Matvos & Amit Seru, 2016. "Advertising Expensive Mortgages," Journal of Finance, American Finance Association, vol. 71(5), pages 2371-2416, October.
    6. Green, Richard K. & LaCour-Little, Michael, 1999. "Some Truths about Ostriches: Who Doesn't Prepay Their Mortgages and Why They Don't," Journal of Housing Economics, Elsevier, vol. 8(3), pages 233-248, September.
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    More about this item

    Keywords

    Advertising; Mistakes; Mortgage; Refinancing;

    JEL classification:

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

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