Consumer Mistakes and Advertising: The Case of Mortgage Refinancing

53 Pages Posted: 29 Jun 2017

See all articles by Serafin Grundl

Serafin Grundl

Board of Governors of the Federal Reserve System

You Suk Kim

Board of Governors of the Federal Reserve System

Date Written: 2017-06-27

Abstract

Does advertising help consumers to find the products they need or push them to buy products they don't need? In this paper, we study the effects of advertising on consumer mistakes and quantify the resulting effect on consumer welfare in the market for mortgage refinancing. Mortgage borrowers frequently make costly refinancing mistakes by either refinancing when they should wait, or by waiting when they should refinance. We assemble a novel data set that combines a borrower's exposure to direct mail refinance advertising and their subsequent refinancing decisions. Even though on average borrowers would lose approximately $500 by refinancing, the average monthly exposure of 0.23 refinancing advertisements reduces the expected net present value of mortgage payments on average by $13, because borrowers who should refinance are targeted by advertisers and more responsive to advertising. A counterfactual advertising policy that redirects all advertising to borrowers who should refinance would increase the gain in borrower welfare to $45.

Keywords: Advertising, Mistakes, Mortgage, Refinancing

JEL Classification: D14, G21, M37

Suggested Citation

Grundl, Serafin and Kim, You Suk, Consumer Mistakes and Advertising: The Case of Mortgage Refinancing (2017-06-27). FEDS Working Paper No. 2017-067. Available at SSRN: https://ssrn.com/abstract=2994712 or http://dx.doi.org/10.17016/FEDS.2017.067

Serafin Grundl (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

You Suk Kim

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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