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Inattention and Inertia in Household Finance: Evidence from the Danish Mortgage Market

Author

Listed:
  • Andersen, Steffen
  • Campbell, John Y.
  • Meisner-Nielsen, Kasper
  • Ramadorai, Tarun

Abstract

This paper studies the refinancing behavior of Danish households during a recent period of declining interest rates. Danish data are particularly suitable for this purpose because the Danish mortgage system imposes few barriers to refinancing, and demographic and economic characteristics of mortgage borrowers can be accurately measured. The paper finds that household characteristics affect both inattention (a low responsiveness of mortgage refinancing to financial incentives) and inertia (a low unconditional probability of refinancing). Many characteristics move inattention and inertia in the same direction, implying a high cross-sectional correlation of 0.76 between these two household attributes. Middle-aged and older households show greater inertia and inattention than young households. Education and income reduce both inertia and inattention, but the effect of education is greater among more educated households, while the effect of income is greater among poorer households. Housing and financial wealth have opposite effects on inertia, consistent with the view that households manage their mortgages more actively when housing is relatively more important to them.

Suggested Citation

  • Andersen, Steffen & Campbell, John Y. & Meisner-Nielsen, Kasper & Ramadorai, Tarun, 2014. "Inattention and Inertia in Household Finance: Evidence from the Danish Mortgage Market," Scholarly Articles 17492179, Harvard University Department of Economics.
  • Handle: RePEc:hrv:faseco:17492179
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    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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