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American Economic Review: Vol. 102 No. 7 (December 2012)

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Diagnosing Consumer Confusion and Sub-optimal Shopping Effort: Theory and Mortgage-Market Evidence

Article Citation

Woodward, Susan E., and Robert E. Hall. 2012. "Diagnosing Consumer Confusion and Sub-optimal Shopping Effort: Theory and Mortgage-Market Evidence." American Economic Review, 102(7): 3249-76.

DOI: 10.1257/aer.102.7.3249

Abstract

Mortgage loans are leading examples of transactions where experts on one side of the market take advantage of consumers' lack of knowledge and experience. We study the compensation that borrowers pay to mortgage brokers for assistance from application to closing. Two findings support the conclusion that confused borrowers overpay for brokers' services: (i ) A model of effective shopping shows that borrowers sacrifice at least $1,000 by shopping from too few brokers. (ii ) Borrowers who compensate their brokers with both cash and a commission from the lender pay twice as much as similar borrowers who pay no cash. (JEL D12, D14, G21)

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Authors

Woodward, Susan E. (Sand Hill Econometrics, Menlo Park, CA)
Hall, Robert E. (Hoover Institution, Stanford U)

JEL Classifications

D12: Consumer Economics: Empirical Analysis
D14: Personal Finance
G21: Banks; Depository Institutions; Micro Finance Institutions; Mortgages


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