Behaviorally Informed Home Mortgage Regulation

47 Pages Posted: 16 Apr 2008

See all articles by Michael S. Barr

Michael S. Barr

University of Michigan Law School; University of Michigan at Ann Arbor - Gerald R. Ford School of Public Policy; University of Michigan, Center on Finance, Law, and Policy

Sendhil Mullainathan

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Eldar Shafir

Princeton University

Date Written: April 15, 2008

Abstract

Choosing a mortgage is one of the biggest financial decisions an American consumer will make. Yet it can be a complicated one, especially in today's environment where mortgages vary in dimensions and unique features. This complexity has raised regulatory issues. Should some features be regulated? Should product disclosure be regulated? And most basic of all, is there a rationale for regulation or will the market solve the problem? Current regulation of home mortgages is largely stuck in two competing models of regulation - disclosure and usury or product restrictions - neither of which take adequate account of behavioral psychology or market incentives. This paper seeks to use insights from both psychology and economics to provide a framework for understanding both these models as well as to suggest fundamentally new models. We understand outcomes as an equilibrium interaction between individuals with specific psychologies and firms that respond to those psychologies within specific markets. Regulation must then account for failures in this equilibrium.

Suggested Citation

Barr, Michael S. and Mullainathan, Sendhil and Shafir, Eldar, Behaviorally Informed Home Mortgage Regulation (April 15, 2008). Available at SSRN: https://ssrn.com/abstract=1121199 or http://dx.doi.org/10.2139/ssrn.1121199

Michael S. Barr (Contact Author)

University of Michigan Law School ( email )

625 South State Street
Ann Arbor, MI 48109-1215
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734-936-2878 (Phone)
734-936-7514 (Fax)

University of Michigan at Ann Arbor - Gerald R. Ford School of Public Policy ( email )

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University of Michigan, Center on Finance, Law, and Policy ( email )

735 S. State Street, Suite 5211
Ann Arbor, MI 48109
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Sendhil Mullainathan

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
617-496-2720 (Phone)
617-495-7730 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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617-588-1473 (Phone)
617-876-2742 (Fax)

Eldar Shafir

Princeton University ( email )

22 Chambers Street
Princeton, NJ 08544-0708
United States

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