Consumer Mistakes and Advertising : The Case of Mortgage Refinancing

Grundl, Serafin J.; Kim, You Suk

doi:10.17016/FEDS.2017.067

Working Paper

Consumer Mistakes and Advertising : The Case of Mortgage Refinancing

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 effects of advertising on consumer mistakes and quantify the resulting effect on consumer welfare in the market for mortgage refinancing. 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 on average borrowers would lose approximately $500 by refinancing, the average monthly exposure of 0.23 refinancing advertisements reduces the expected net present value of mortgage payments on average by $13, 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 $45.

Keywords: Advertising; Mistakes; Mortgage; Refinancing;

JEL Classification: D14; G21; M37;

https://doi.org/10.17016/FEDS.2017.067