Refinancing Cross-Subsidies in the Mortgage Market

81 Pages Posted: 18 Nov 2021 Last revised: 22 Dec 2023

See all articles by Jack Fisher

Jack Fisher

Independent

Alessandro Gavazza

London School of Economics & Political Science (LSE) - Department of Economics

Lu Liu

University of Pennsylvania - Finance Department

Tarun Ramadorai

Imperial College London; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Jagdish Tripathy

Bank of England

Date Written: April 21, 2023

Abstract

In household finance markets, inactive households can implicitly cross-subsidize active households who promptly respond to financial incentives. We assess the magnitude and distribution of cross-subsidies in the mortgage market. To do so, we build a structural model of household mortgage refinancing and estimate it on rich administrative data covering the stock of outstanding mortgages in the UK. We estimate sizeable cross-subsidies that flow from relatively poorer households and those located in less-wealthy areas towards richer households and those located in wealthier areas. Our work highlights how the design of household finance markets can contribute to wealth inequality.

Keywords: Mortgages, refinancing, cross-subsidies, wealth inequality, household inaction, household finance, inertia

JEL Classification: G21, G50, N20, R21, R31, L51, D63

Suggested Citation

Fisher, Jack and Gavazza, Alessandro and Liu, Lu and Ramadorai, Tarun and Tripathy, Jagdish, Refinancing Cross-Subsidies in the Mortgage Market (April 21, 2023). Available at SSRN: https://ssrn.com/abstract=3962433 or http://dx.doi.org/10.2139/ssrn.3962433

Jack Fisher

Independent ( email )

Alessandro Gavazza

London School of Economics & Political Science (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Lu Liu

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

Tarun Ramadorai (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

HOME PAGE: http://www.tarunramadorai.com

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Jagdish Tripathy

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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