Working Paper: CEPR ID: DP10683
Authors: Steffen Andersen; John Y. Campbell; Kasper Meisner Nielsen; Tarun Ramadorai
Abstract: A common problem in household finance is that households are often inactive in response to incentives. Mortgages are generally the largest household liability, and mortgage refinancing is an important channel for monetary policy transmission, so inactivity in this setting can be socially costly. We study how the Danish population responds to mortgage refinancing incentives between 2010 and 2014, building an empirical model that identifies two important sources of inactivity: inattention (a low probability of responding to a refinancing incentive in a given quarter), and inertia (a psychological addition to the financial cost of refinancing). Inertia is hump-shaped in age and generally increasing in socioeconomic status, while inattention is highest for older households and households with low income, education, housing wealth, and financial wealth, making it the key determinant of low refinancing among households with low socioeconomic status. Our model highlights the importance of policies to make such households aware of refinancing opportunities or to refinance mortgages automatically.
Keywords: Denmark; Household Finance; Inattention; Inertia; Mortgages; Refinancing
JEL Codes: G21; N20; R21; R31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| inattention (D91) | lower probability of refinancing (G21) |
| inertia (D52) | increases with age and socioeconomic status (I14) |
| inattention (D91) | lower probability of refinancing (G21) |
| inertia (D52) | delay in refinancing (G51) |
| financial incentives (M52) | refinancing behavior (G51) |
| inertia diminishes when incentives are sufficiently large (H31) | refinancing behavior (G51) |