The cost of steering in financial markets: Evidence from the mortgage market

We build a model of the mortgage market in which banks attain their optimal mortgage portfolio by setting rates and steering customers. Sophisticated households know which mortgage type is best for them; naive households are susceptible to banks’ steering. Using data on the universe of Italian mortg...

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Bibliographic Details
Published in:Journal of financial economics 2022-03, Vol.143 (3), p.1209-1226
Main Authors: Guiso, Luigi, Pozzi, Andrea, Tsoy, Anton, Gambacorta, Leonardo, Mistrulli, Paolo Emilio
Format: Article
Language:English
Subjects:
Campaigns
Consumer protection
COVID-19
Customers
Distortion
Financial advice
Financial literacy
Households
Mortgage market
Mortgages
Steering
Welfare
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Summary:We build a model of the mortgage market in which banks attain their optimal mortgage portfolio by setting rates and steering customers. Sophisticated households know which mortgage type is best for them; naive households are susceptible to banks’ steering. Using data on the universe of Italian mortgages, we estimate the model and quantify the welfare implications of steering. The average cost of the distortion is equivalent to 16% of the annual mortgage payment. A financial literacy campaign is beneficial for naive households, but hurts sophisticated ones. Since steering also conveys information about mortgages, restricting steering might result in significant welfare losses.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2021.05.013