The Cost of Steering in Financial Markets: Evidence from the Mortgage Market

84 Pages Posted: 11 Apr 2017 Last revised: 12 Dec 2020

See all articles by Luigi Guiso

Luigi Guiso

Einaudi Institute for Economics and Finance (EIEF); Einaudi Institute for Economics and Finance

Andrea Pozzi

Einaudi Institute for Economics and Finance (EIEF)

Anton Tsoy

University of Toronto - Department of Economics

Leonardo Gambacorta

Bank for International Settlements (BIS); Centre for Economic Policy Research (CEPR)

Paolo Emilio Mistrulli

Bank of Italy

Multiple version iconThere are 3 versions of this paper

Date Written: December 11, 2020

Abstract

We build a model of the mortgage market where banks attain their optimal mortgage portfolio by setting rates and steering customers. Sophisticated households know which mortgage type is best for them; naive households are susceptible to banks' steering. Using data on the universe of Italian mortgages, we estimate the model and quantify the welfare implications of steering. The average cost of the distortion is equivalent to 16% of the annual mortgage payment. A financial literacy campaign is beneficial for naive households, but hurts sophisticated ones. Since steering also conveys information about mortgages, restricting steering might result in significant welfare losses.

Keywords: steering, financial advice, mortgage market, consumer protection

JEL Classification: G21, D18, D12

Suggested Citation

Guiso, Luigi and Guiso, Luigi and Pozzi, Andrea and Tsoy, Anton and Gambacorta, Leonardo and Mistrulli, Paolo Emilio, The Cost of Steering in Financial Markets: Evidence from the Mortgage Market (December 11, 2020). Available at SSRN: https://ssrn.com/abstract=2951042 or http://dx.doi.org/10.2139/ssrn.2951042

Luigi Guiso

Einaudi Institute for Economics and Finance (EIEF) ( email )

Via Sallustiana 62
Rome, 00187
Italy
+39 06 4792 4858 (Phone)
+39 06 4792 4872 (Fax)

HOME PAGE: http://www.eief.it/faculty-visitors/faculty-a-z/luigi-guiso/

Einaudi Institute for Economics and Finance ( email )

Via Sallustiana 62
rome, 00187
Italy

Andrea Pozzi

Einaudi Institute for Economics and Finance (EIEF) ( email )

Via Due Macelli, 73
Rome, 00187
Italy

Anton Tsoy (Contact Author)

University of Toronto - Department of Economics ( email )

150 St. George Street
Toronto, Ontario M5S3G7
Canada

Leonardo Gambacorta

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Paolo Emilio Mistrulli

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

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