Sources of Inaction in Household Finance: Evidence from the Danish Mortgage Market

71 Pages Posted: 9 Jul 2014 Last revised: 20 Mar 2018

Steffen Andersen

Copenhagen Business School - Department of Finance; CEPR

John Y. Campbell

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

Kasper Meisner Nielsen

Hong Kong University of Science & Technology (HKUST) - Department of Finance

Tarun Ramadorai

Imperial College London; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: March 15, 2018

Abstract

A common problem in household finance is that households are often inactive in response to incentives. Mortgages are generally the largest household liability, and mortgage refinancing is an important channel for monetary policy transmission, so inactivity in this setting can be socially costly. We study how the Danish population responds to mortgage refinancing incentives between 2010 and 2014, building an empirical model that separately estimates time-dependent inaction (a low probability of responding to a refinancing incentive in a given quarter), and state-dependent inaction (a psychological addition to the financial cost of refinancing). Psychological costs of refinancing are hump-shaped in age and generally increasing in socioeconomic status, consistent with the view that these costs may partly reflect the value of time spent refinancing. The probability of responding to any incentive is lowest for older households and households with low income, education, housing wealth, and financial wealth. Thus time-dependent inaction is the key determinant of low refinancing among households with low socioeconomic status. Our model highlights the importance of policies to make such households aware of refinancing opportunities or to refinance mortgages automatically.

Keywords: mortgages, refinancing, time-dependent inaction, state-dependent inaction, household finance, monetary policy, Denmark

JEL Classification: G21, N20, R21, R31

Suggested Citation

Andersen, Steffen and Campbell, John Y. and Nielsen, Kasper Meisner and Ramadorai, Tarun, Sources of Inaction in Household Finance: Evidence from the Danish Mortgage Market (March 15, 2018). Available at SSRN: https://ssrn.com/abstract=2463575 or http://dx.doi.org/10.2139/ssrn.2463575

Steffen Andersen

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

CEPR ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

John Y. Campbell

Harvard University - Department of Economics ( email )

Littauer Center
Room 213
Cambridge, MA 02138
United States
617-496-6448 (Phone)
617-495-7730 (Fax)

HOME PAGE: http://scholar.harvard.edu/campbell

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Kasper Meisner Nielsen

Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )

Clear Water Bay, Kowloon
Hong Kong

Tarun Ramadorai (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

HOME PAGE: http://www.tarunramadorai.com

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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