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Consumer mistakes and advertising: The case of mortgage refinancing

Serafin Grundl () and You Suk Kim ()
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Serafin Grundl: Federal Reserve Board
You Suk Kim: Federal Reserve Board

Quantitative Marketing and Economics (QME), 2019, vol. 17, issue 2, 161-213

Abstract: 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 (search for similar items in EconPapers)
JEL-codes: M37 G21 D14 (search for similar items in EconPapers)
Date: 2019
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