The Cost of Steering in Financial Markets: Evidence from the Mortgage Market
69 Pages Posted: 4 Jul 2017 Last revised: 2 Oct 2018
Date Written: June 2017
Many households lack sophistication required to make complex financial decisions and can be steered by intermediaries to certain financial products via informative or distorted advice, advertisement, shrouding, etc. We build a model of the mortgage market in which banks attain their optimal mortgage portfolio by both setting rates and steering their clientele. "Sophisticated" households know which mortgage type is best for them; "naive" are susceptible to bank's steering. Using data on the universe of Italian mortgages, we estimate the model and quantify the welfare implications of steering in this market. The averagecost of the distortion is equivalent to an increase in the annual mortgage payment by 11%. However, since steering often also conveys information about mortgages, restricting steering results in a loss of 998 euros per year on average. A financial literacy campaign is beneficial for naive households, but hurts sophisticated ones.
Keywords: consumer protection, financial advice, mortgage market, steering
JEL Classification: D12, D18, G21
Suggested Citation: Suggested Citation