The Cost of Steering in Financial Markets: Evidence from the Mortgage Market
84 Pages Posted: 11 Apr 2017 Last revised: 12 Dec 2020
Date Written: December 11, 2020
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: Suggested Citation