DP17491 Refinancing Cross-Subsidies in the Mortgage Market

Author(s): Jack Fisher, Alessandro Gavazza, Lu Liu, Tarun Ramadorai, Jagdish Tripathy
Publication Date: July 2022
Keyword(s): cross-subsidies, household finance, household inaction, inertia, Mortgages, refinancing, Wealth Inequality
JEL(s): D63, G21, G50, L51, N20, R21, R31
Programme Areas: Financial Economics, Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=17491

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.