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Diagnosing Consumer Confusion and Sub-Optimal Shopping Effort: Theory and Mortgage-Market Evidence

  • Susan E. Woodward
  • Robert E. Hall

Mortgage loans are leading examples of transactions where experts on one side of the market take advantage of consumers' lack of knowledge and experience. We study the compensation that borrowers pay to mortgage brokers for assistance from application to closing. Two findings support the conclusion that confused borrowers overpay for brokers' services: (1) A model of effective shopping shows that borrowers sacrifice at least $1,000 by shopping from too few brokers. (2) Borrowers who compensate their brokers with both cash and a commission from the lender pay twice as much as similar borrowers who pay no cash.

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File URL: http://www.nber.org/papers/w16007.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16007.

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Date of creation: May 2010
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Publication status: published as Susan E. Woodward & Robert E. Hall, 2012. "Diagnosing Consumer Confusion and Sub-optimal Shopping Effort: Theory and Mortgage-Market Evidence," American Economic Review, American Economic Association, vol. 102(7), pages 3249-76, December.
Handle: RePEc:nbr:nberwo:16007
Note: EFG IO
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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  1. Marsha Courchane & David Nickerson, 1997. "Discrimination Resulting from Overage Practices," Journal of Financial Services Research, Springer, vol. 11(1), pages 133-151, February.
  2. Antje Berndt & Burton Hollifield & Patrik Sandås, 2010. "The Role of Mortgage Brokers in the Subprime Crisis," NBER Chapters, in: Market Institutions and Financial Market Risk National Bureau of Economic Research, Inc.
  3. Ayres, Ian & Siegelman, Peter, 1995. "Race and Gender Discrimination in Bargaining for a New Car," American Economic Review, American Economic Association, vol. 85(3), pages 304-21, June.
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