Refinancing Cross-Subsidies in the Mortgage Market

Jack Fisher, Alessandro Gavazza, Lu Liu, Tarun Ramadorai and Jagdish Tripathy

No 17491, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In household finance markets, inactive households can implicitly cross-subsidize active households who promptly respond to financial incentives. We assess the magnitude and distribution of cross-subsidies in the mortgage market. To do so, we build a model of household mortgage refinancing and structurally estimate it on rich administrative data on the stock of outstanding UK mortgages in June 2015. We estimate sizeable cross-subsidies during this sample period, from relatively poorer households and those located in less-wealthy areas towards richer households and those located in wealthier areas. Our work highlights how the design of household finance markets can contribute to wealth inequality. Estimated cross-subsidies may differ in more recent periods given changes in the UK mortgage market since 2015.

Keywords: Mortgages; Refinancing; Cross-subsidies; Wealth inequality; Household inaction; Household finance; Inertia (search for similar items in EconPapers)
JEL-codes: D63 G21 G50 L51 N20 R21 R31 (search for similar items in EconPapers)
Date: 2022-07
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Related works:
Journal Article: Refinancing cross-subsidies in the mortgage market (2024)
Working Paper: Refinancing cross-subsidies in the mortgage market (2024)
Working Paper: Refinancing cross-subsidies in the mortgage market (2021)
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