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

John Campbell and Kasper Meisner Nielsen
Authors registered in the RePEc Author Service: Tarun Ramadorai and Steffen Andersen

No 10683, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: A common problem in household finance is that households are often inactive in response to incentives. Mortgages are generally the largest household liability, and mortgage refinancing is an important channel for monetary policy transmission, so inactivity in this setting can be socially costly. We study how the Danish population responds to mortgage refinancing incentives between 2010 and 2014, building an empirical model that identifies two important sources of inactivity: inattention (a low probability of responding to a refinancing incentive in a given quarter), and inertia (a psychological addition to the financial cost of refinancing). Inertia is hump-shaped in age and generally increasing in socioeconomic status, while inattention is highest for older households and households with low income, education, housing wealth, and financial wealth, making it the key determinant of low refinancing among households with low socioeconomic status. Our model highlights the importance of policies to make such households aware of refinancing opportunities or to refinance mortgages automatically.

Keywords: Denmark; Household finance; Inattention; Inertia; Mortgages; Refinancing (search for similar items in EconPapers)
JEL-codes: G21 N20 R21 R31 (search for similar items in EconPapers)
Date: 2015-07
New Economics Papers: this item is included in nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (64)

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Working Paper: Inattention and Inertia in Household Finance: Evidence from the Danish Mortgage Market (2014)
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