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

69 Pages Posted: 4 Jul 2017 Last revised: 2 Oct 2018

See all articles by Leonardo Gambacorta

Leonardo Gambacorta

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

Luigi Guiso

Einaudi Institute for Economics and Finance (EIEF)

Paolo Emilio Mistrulli

Bank of Italy

Andrea Pozzi

Einaudi Institute for Economics and Finance (EIEF)

Anton Tsoy

University of Toronto - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: June 2017

Abstract

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

Gambacorta, Leonardo and Guiso, Luigi and Mistrulli, Paolo Emilio and Pozzi, Andrea and Tsoy, Anton, The Cost of Steering in Financial Markets: Evidence from the Mortgage Market (June 2017). CEPR Discussion Paper No. DP12115. Available at SSRN: https://ssrn.com/abstract=2996660

Leonardo Gambacorta (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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/

Paolo Emilio Mistrulli

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

Andrea Pozzi

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

Via Due Macelli, 73
Rome, 00187
Italy

Anton Tsoy

University of Toronto - Department of Economics ( email )

150 St. George Street
Toronto, Ontario M5S3G7
Canada

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