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Discussion Paper Details

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Title: The Cost of Steering in Financial Markets: Evidence from the Mortgage Market

Author(s): Leonardo Gambacorta, Luigi Guiso, Paolo Emilio Mistrulli, Andrea Pozzi and Anton Tsoy

Publication Date: June 2017

Keyword(s): consumer protection, financial advice, mortgage market and steering

Programme Area(s): Financial Economics and Industrial Organization

Abstract: We build a model of the mortgage market where banks attain their optimal mortgage portfolio by setting rates and steering customers. "Sophisticated" households know which mortgage type is best for them; "naive" are susceptible to bank's 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 19% of the annual mortgage payment. Since steering also conveys information about mortgages, restricting steering results in a 4% loss. A financial literacy campaign is beneficial for naive households, but hurts sophisticated ones.

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Bibliographic Reference

Gambacorta, L, Guiso, L, Mistrulli, P, Pozzi, A and Tsoy, A. 2017. 'The Cost of Steering in Financial Markets: Evidence from the Mortgage Market'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=12115