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Consumer mistakes and advertising: The case of mortgage refinancing

  • Serafin GrundlEmail author
  • You Suk Kim
Article
  • 53 Downloads

Abstract

Does advertising help consumers to find the products they need or push them to buy products they don’t need? In this paper we study the heterogeneous effects of advertising on consumer mistakes in the market for mortgage refinancing and quantify the resulting overall effect on the net present value of mortgage debt. Mortgage borrowers frequently make costly refinancing mistakes by either refinancing when they should wait, or by waiting when they should refinance. We assemble a novel data set that combines a borrower’s exposure to direct mail refinance advertising and their subsequent refinancing decisions. Even though borrowers would lose on average $1229 by refinancing, the average monthly exposure of 0.13 refinancing direct mail advertisements reduces the expected net present value of mortgage payments on average by $7 each month, because borrowers who should refinance are targeted by advertisers and more responsive to advertising. A counterfactual advertising policy that redirects all advertising to borrowers who should refinance would increase the gain in borrower welfare to $36.

Keywords

Advertising Mistakes Mortgage Refinancing 

JEL Classification

M37 G21 D14 

Notes

Acknowledgments

We thank Sanjog Misra (discussant), Richard Rosen, John Driscoll and Naoki Aizawa for comments that helped to improve the paper. Pete Jacobsen and Meher Islam provided outstanding research assistance. We thank Hank Korytkowski from Equifax for explaining how refi advertisers assemble their mailing lists. The analysis and conclusions set forth are those of the authors and do not indicate concurrence by other members of the staff, by the Board of Governors, or by the Federal Reserve Banks.

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Copyright information

© This is a U.S. Government work and not under copyright protection in the US; foreign copyright protection may apply 2019

Authors and Affiliations

  1. 1.Federal Reserve BoardWashingtonUSA

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