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Refinancing cross-subsidies in the mortgage market

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

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 structural model of household mortgage refinancing and estimate it on rich administrative data covering the stock of outstanding mortgages in the UK. We estimate sizeable cross-subsidies that flow 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.

Suggested Citation

  • Fisher, Jack & Gavazza, Alessandro & Liu, Lu & Ramadorai, Tarun & Tripathy, Jagdish, 2024. "Refinancing cross-subsidies in the mortgage market," Journal of Financial Economics, Elsevier, vol. 158(C).
    • Handle: RePEc:eee:jfinec:v:158:y:2024:i:c:s0304405x24000990
    DOI: 10.1016/j.jfineco.2024.103876
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    More about this item

    Keywords

    Mortgages; Refinancing; Cross-subsidies; Wealth inequality; Household inaction and inertia; Household finance;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G50 - Financial Economics - - Household Finance - - - General
    • N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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