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The Hidden Costs of Hidden Debt

Author

Listed:
  • Johan Almenberg

    (Regeringskansliet, Finansdepartementet)

  • Artashes Karapetyan

    (Norges Bank, Oslo)

Abstract

We report evidence that salience may have economically significant effects on homeowners' borrowing behavior, through a bias in favour of less salient but more costly loans. Survey evidence corroborates the existence of such a bias. We outline a simple model in which some consumers are biased and show that under plausible assumptions this a§ects prices in equilibrium. Market data support the predictions of the model.

Suggested Citation

  • Johan Almenberg & Artashes Karapetyan, 2011. "The Hidden Costs of Hidden Debt," Working Papers 1206, Departament Empresa, Universitat Autònoma de Barcelona, revised Oct 2011.
    • Handle: RePEc:bbe:wpaper:1206
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    File URL: http://www.uab.cat/doc/DOC_WP_12_06
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    References listed on IDEAS

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    1. Markus K. Brunnermeier & Christian Julliard, 2008. "Money Illusion and Housing Frenzies," The Review of Financial Studies, Society for Financial Studies, vol. 21(1), pages 135-180, January.
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    8. Amy Finkelstein, 2009. "E-ztax: Tax Salience and Tax Rates," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 124(3), pages 969-1010.
    9. Hjalmarsson, Erik & Hjalmarsson, Randi, 2009. "Efficiency in housing markets: Which home buyers know how to discount?," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 2150-2163, November.
    10. Sumit Agarwal & John C. Driscoll & David I. Laibson, 2013. "Optimal Mortgage Refinancing: A Closed‐Form Solution," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(4), pages 591-622, June.
    11. Sumit Agarwal & Gene Amromin & Itzhak Ben-David & Souphala Chomsisengphet & Douglas D. Evanoff, 2009. "Do financial counseling mandates improve mortgage choice and performance? Evidence from a legislative experiment," Working Paper Series WP-09-07, Federal Reserve Bank of Chicago.
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    13. Victor Stango & Jonathan Zinman, 2009. "What Do Consumers Really Pay on Their Checking and Credit Card Accounts? Explicit, Implicit, and Avoidable Costs," American Economic Review, American Economic Association, vol. 99(2), pages 424-429, May.
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    Cited by:

    1. Karapetyan, A. & Kværner, Jens & Rohrer, Maximilian, 2024. "Inefficient regulation: Mortgages versus total credit," Other publications TiSEM f1611bef-5be9-46fc-8a3e-1, Tilburg University, School of Economics and Management.
    2. Ha Trong Nguyen & Alan Duncan, 2015. "Macroeconomic Fluctuations in Home Countries and Immigrants’ Wellbeing: New Evidence from Down Under," Bankwest Curtin Economics Centre Working Paper series WP1502, Bankwest Curtin Economics Centre (BCEC), Curtin Business School.
    3. Sumit Agarwal & Artashes Karapetyan, 2022. "Information Salience and Mispricing in Housing," Management Science, INFORMS, vol. 68(12), pages 9082-9106, December.
    4. Cristian Badarinza & John Y. Campbell & Tarun Ramadorai, 2016. "International Comparative Household Finance," Annual Review of Economics, Annual Reviews, vol. 8(1), pages 111-144, October.
    5. Olivier Mesly & Hareesh Mavoori & Nicolas Huck, 2023. "The Role of Financial Spinning, Learning, and Predation in Market Failure," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 14(1), pages 517-543, March.

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    More about this item

    Keywords

    salience; debt; housing market; co-op; capital tructure;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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