Sources of Inaction in Household Finance: Evidence from the Danish Mortgage Market
71 Pages Posted: 9 Jul 2014 Last revised: 20 Mar 2018
Date Written: March 15, 2018
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: Suggested Citation