Inattention and Inertia in Household Finance: Evidence from the Danish Mortgage Market

By Steffen Andersen, John Y. Campbell, Kasper Meisner Nielsen, Tarun Ramadorai. 2015

170 citations recorded by the source corpus.

This paper studies inattention to mortgage refinancing incentives among Danish households. Danish data are particularly suitable for this purpose because there are minimal barriers to refinancing, yet many borrowers fail to refinance optimally, and the characteristics of these borrowers can be accurately measured. The paper estimates a mixture model of household refinancing types in which household characteristics affect both inattention (a low proportion of rational refinancers) and residual inertia (a low probability that fully inattentive households refinance). Many characteristics move inattention and inertia in the same direction, implying a positive cross-sectional correlation of 0.62 between these two household attributes. Younger, better educated, and higher-income households have less inertia and less inattention. Financial wealth and housing wealth have opposite effects, with the least inertia and inattention among households whose housing wealth is high relative to their financial wealth. There is suggestive evidence of persistent unobserved heterogeneity in attention.

Subfields: Accounting, Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/ab2269111466e02cf107e825a5e8bcff7192580e

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Accounting

1. M. Lenza
2. Jiří Slačálek
3. Ricardo M. Sousa
4. Frank Smets
5. Marek Jarociński

In Economics and Econometrics

1. Jiří Slačálek
2. M. Lenza
3. Marek Jarociński
4. Ricardo M. Sousa
5. Frank Smets

In Finance

1. M. Lenza
2. Jiří Slačálek

Citations in the corpus

• The Mortgage Credit Channel of Macroeconomic Transmission (2016, unknown): “As documented in Andersen et al. (2014) and Keys et al. (2014) , among others, borrowers often do not prepay their mortgages even when it is in their financial interest to do so. Calibrating the cost distribution Γκ can capture the level and sensitivity of prepayment in the data, but likely implies ”
• Mortgage Refinancing, Consumer Spending, and Competition: Evidence from the Home Affordable Refinancing Program (2015, unknown): “…contracts do not require the active participation of borrowers in the process of rate reduction, they can help alleviate the adverse effects of borrower inertia and inattention on mortgage refinancing (see Keys, Pope, and Pope 2014 and Andersen et al. 2014 for the recent evidence on these factors).”
• Restoring Rational Choice: The Challenge of Consumer Financial Regulation (2016, unknown): “In the US, some of this behavior could be explained by unmeasured constraints, but Andersen et al. (2015) show that the same is true in Denmark, where refinancing is always possible even for households with negative home equity or a poor credit score.”
• How Quantitative Easing Works: Evidence on the Refinancing Channel (2016, unknown): “41A longstanding literature in mortgage finance, starting with Stanton (1995), and including recent work by Andersen et al. (2015) and Keys et al. (forthcoming), documents behavioral factors such as inattention that lead mortgagors to suboptimally respond to refinancing opportunities. 42See also Fus”
• Mortgage Rates, Household Balance Sheets, and the Real Economy (2014, unknown): “Fourth, existing research provides evidence of significant inertia and inattention in mortgage refinancing decisions by borrowers (e.g., Keys, Pope, and Pope 2014; Andersen et al. 2014).”
• How Does Monetary Policy Affect Income and Wealth Inequality? Evidence from Quantitative Easing in the Euro Area (2018, methodology): “This assumption is supported by the empirical evidence on considerable inertia in household portfolios, e.g., Ameriks and Zeldes (2004), Brunnermeier and Nagel (2008), Andersen et al. (2020) and others.”