Discussion paper Financial Markets

DP17491 Refinancing Cross-Subsidies in the Mortgage Market

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.

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Citation

Fisher, J, A Gavazza, L Liu, T Ramadorai and J Tripathy (2022), ‘DP17491 Refinancing Cross-Subsidies in the Mortgage Market‘, CEPR Discussion Paper No. 17491. CEPR Press, Paris & London. https://cepr.org/publications/dp17491