Diagnosing Consumer Confusion and Sub-optimal Shopping Effort: Theory and Mortgage-Market Evidence

Susan E. Woodward and Robert Hall ()

American Economic Review, 2012, vol. 102, issue 7, 3249-76

Abstract: Mortgage loans are leading examples of transactions where experts on one side of the market take advantage of consumers' lack of knowledge and experience. We study the compensation that borrowers pay to mortgage brokers for assistance from application to closing. Two findings support the conclusion that confused borrowers overpay for brokers' services: (i ) A model of effective shopping shows that borrowers sacrifice at least $1,000 by shopping from too few brokers. (ii ) Borrowers who compensate their brokers with both cash and a commission from the lender pay twice as much as similar borrowers who pay no cash. (JEL D12, D14, G21)

JEL-codes: D12 D14 G21 (search for similar items in EconPapers)
Date: 2012
Note: DOI: 10.1257/aer.102.7.3249
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Citations: View citations in EconPapers (133)

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Working Paper: Diagnosing Consumer Confusion and Sub-Optimal Shopping Effort: Theory and Mortgage-Market Evidence (2010)
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