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

Steffen Andersen, John Y. Campbell, Kasper Meisner Nielsen, Tarun Ramadorai

Research output: Working paperResearch

Abstract

This paper studies inattention to mortgage refinancing incentives among Danish households. Danish data are particularly suitable for this purpose because there are minimal barriers to refinancing, yet many borrowers fail to refinance optimally, and the characteristics of these borrowers can be accurately measured. The paper estimates a mixture model of household refinancing types in which household characteristics affect both inattention (a low proportion of rational refinancers) and residual inertia (a low probability that fully inattentive households refinance). Many characteristics move inattention and inertia in the same direction, implying a positive cross-sectional correlation of 0.62 between these two household attributes. Younger, better educated, and higher-income households have less inertia and less inattention. Financial wealth and housing wealth have opposite effects, with the least inertia and inattention among households whose housing wealth is high relative to their financial wealth. There is suggestive evidence of persistent unobserved heterogeneity in attention
This paper studies inattention to mortgage refinancing incentives among Danish households. Danish data are particularly suitable for this purpose because there are minimal barriers to refinancing, yet many borrowers fail to refinance optimally, and the characteristics of these borrowers can be accurately measured. The paper estimates a mixture model of household refinancing types in which household characteristics affect both inattention (a low proportion of rational refinancers) and residual inertia (a low probability that fully inattentive households refinance). Many characteristics move inattention and inertia in the same direction, implying a positive cross-sectional correlation of 0.62 between these two household attributes. Younger, better educated, and higher-income households have less inertia and less inattention. Financial wealth and housing wealth have opposite effects, with the least inertia and inattention among households whose housing wealth is high relative to their financial wealth. There is suggestive evidence of persistent unobserved heterogeneity in attention
LanguageEnglish
Place of PublicationCambridge, MA
PublisherNational Bureau of Economic Research (NBER)
Number of pages52
DOIs
StatePublished - 2015
SeriesNational Bureau of Economic Research. Working Paper Series
Number21386
ISSN0898-2937

Cite this

Andersen, S., Campbell, J. Y., Meisner Nielsen, K., & Ramadorai, T. (2015). Inattention and Inertia in Household Finance: Evidence from the Danish Mortgage Market. Cambridge, MA: National Bureau of Economic Research (NBER). National Bureau of Economic Research. Working Paper Series, No. 21386, DOI: 10.3386/w21386
Andersen, Steffen ; Campbell, John Y. ; Meisner Nielsen, Kasper ; Ramadorai, Tarun. / Inattention and Inertia in Household Finance : Evidence from the Danish Mortgage Market. Cambridge, MA : National Bureau of Economic Research (NBER), 2015. (National Bureau of Economic Research. Working Paper Series; No. 21386).
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Andersen, S, Campbell, JY, Meisner Nielsen, K & Ramadorai, T 2015 'Inattention and Inertia in Household Finance: Evidence from the Danish Mortgage Market' National Bureau of Economic Research (NBER), Cambridge, MA. DOI: 10.3386/w21386

Inattention and Inertia in Household Finance : Evidence from the Danish Mortgage Market. / Andersen, Steffen; Campbell, John Y.; Meisner Nielsen, Kasper; Ramadorai, Tarun.

Cambridge, MA : National Bureau of Economic Research (NBER), 2015.

Research output: Working paperResearch

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Andersen S, Campbell JY, Meisner Nielsen K, Ramadorai T. Inattention and Inertia in Household Finance: Evidence from the Danish Mortgage Market. Cambridge, MA: National Bureau of Economic Research (NBER). 2015. Available from, DOI: 10.3386/w21386