Working Paper: CEPR ID: DP17491
Authors: Jack Fisher; Alessandro Gavazza; Lu Liu; Tarun Ramadorai; Jagdish Tripathy
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 model of household mortgage refinancing and structurally estimate it on rich administrative data on the stock of outstanding UK mortgages in June 2015. We estimate sizeable cross-subsidies during this sample period, 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. Estimated cross-subsidies may differ in more recent periods given changes in the UK mortgage market since 2015.
Keywords: mortgages; refinancing; crosssubsidies; wealth inequality; household inaction; household finance inertia
JEL Codes: G21; G50; N20; R21; R31; L51; D63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| inactive households (D19) | active households (R20) |
| inactive households (D19) | higher reset rates (E43) |
| higher reset rates (E43) | lower discounted rates (E43) |
| inactive households (D19) | wealth inequality (D31) |
| crosssubsidies (H23) | wealth inequality (D31) |
| refinancing behaviors (G51) | crosssubsidies (H23) |
| higher-income households (R20) | benefit from current mortgage system (G21) |