Tax Deductibility, Market Frictions, and Price Discrimination: Evidence from the Mortgage Market.

55 Pages Posted: 19 Jan 2021 Last revised: 21 Jan 2021

See all articles by Maxence Valentin

Maxence Valentin

Pennsylvania State University - Department of Insurance & Real Estate

Date Written: January 11, 2021

Abstract

Although not the primary intended beneficiary of the Mortgage Interest Deduction (MID) program, lenders capture a significant fraction of this government subsidy. This paper shows that borrowers who benefit from the MID pay on average 14.9 basis points higher interest rate than similar borrowers who do not benefit from it. This interest-gap represents a present value of $6,600 (or 2.35% of the original loan amount) for the median borrower. Consistent with a model of first-degree price discrimination, the interest-gap increases (1) with borrowers' marginal tax rate, and (2) with the degree of market frictions such as lenders' concentration, search cost, and leverage in bargaining.

Keywords: Mortgage interest deduction, Distortionary tax, Market power, Redit markets

JEL Classification: G51, H24, H31, R21, R31

Suggested Citation

Valentin, Maxence, Tax Deductibility, Market Frictions, and Price Discrimination: Evidence from the Mortgage Market. (January 11, 2021). Available at SSRN: https://ssrn.com/abstract=3763880 or http://dx.doi.org/10.2139/ssrn.3763880

Maxence Valentin (Contact Author)

Pennsylvania State University - Department of Insurance & Real Estate ( email )

University Park, PA 16802-3306
United States

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