Чланак
дец 31
Назад

WHY DO BORROWERS CHOOSE SUBOPTIMAL MORTGAGE CONTRACTS? A BEHAVIORAL ECONOMICS APPROACH

Ana Odorović

10.5937/AnaliPFB1704135O
САЖЕТАК /

Mortgage contracts have evolved to include a variety of contract design features whose aim is to address the demand of heterogeneous borrowers. Given that borrowers know best their budget constraints and preferences for risk exposure, the question is why many borrowers fail to maximize their welfare through the choice of mortgage contract. The aim of this paper is to explain the causes of suboptimal outcomes in the mortgage market, relying on the theoretical framework of behavioral economics. The first part of the paper provides an overview of the main differences between the rational choice and behavioral economics approach to contract efficiency and discusses the most relevant cognitive biases, identified within behavioral economics. The second part of the paper applies the findings of the two approaches to the issue of mortgage contracts. Considerable attention is devoted to contract design features that are expected to exacerbate the borrower’s cognitive biases. Finally, the paper addresses the issue of why market forces fail to “debias” borrowers and, hence, eliminate inefficient mortgage terms.

ЧЛАНАК ЈЕ РАСПОЛОЖИВ НА /
Енглеском  
РЕФЕРЕНЦЕ /
  • Agarwal, S., Ben-David, I., Yao, V., “Systematic Mistakes in the Mortgage Market and Lack of Financial Sophisti-cation”, Journal of Financial Economics 123(1)/2017.
  • Agarwal, S., Bhashkar, M., “Cognitive Abilities and Household Financial Decision Making”, American Economic Journal: Applied Economics 5(1)/2013.
  • Agarwal, S., Rosen, R. J., Yao, V. W., “Why Do Borrowers Make Mortgage Fefinancing Mistakes?”, 2012, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2446753.
  • Akerlof, G. A., “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism”, The Quarterly Jour-nal of Economics 84(3)/1970.
  • Bakos, Y., Marotta-Wurgler, F., Trossen, D. R., “Does Anyone Read the Fine Print? Consumer Attention to Stan-dard-Form Contracts”, The Journal of Legal Studies 43(1)/2014.
  • Bar-Gill, O., “The Law, Economics and Psychology of Subprime Mortgage Contracts”, Cornell L. Rev 94/2008.
  • Bucks, B., Pence, K., “Do Borrowers Know Their Mortgage Terms?”, Journal of Urban Economics 64(2)/2008.
  • Coase, R. H., “The Problem of Social Cost”, The Journal of Law and Economics 56(4)/2013.
  • Cooter, R., Ulen, T., Law and Economics, Addison-Wesley, Boston-Columbus 20166.
  • Craswell, R., “Passing on the Costs of Legal Rules: Efficiency and Distribution in Buyer-Seller Relations-hips”, Stanford Law Review 43/1991.
  • Dougal, C., Engelberg, J., Parsons, C. A., Van Wesep, E. D., “Anchoring on Credit Spreads”, The Journal of Fi-nance 70(3)/2015.
  • Faure, M. G., Luth, H. A., “Behavioural Economics in Unfair Contract Terms”, Journal of Consumer Policy 34(3)/2011.
  • Gabaix, X., Laibson, D., “Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets”, The Quarterly Journal of Economics 121(2)/2006.
  • Jolls, C., “Behavioral Law and Economics”, National Bureau of Economic Research, w12879/2007, http://www.nber.org/papers/w12879.
  • Korobkin, R. B., Ulen, T. S., “Law and Behavioral Science: Removing the Rationality Assumption from Law and Economics”, California Law Review 88/2000.
  • Korobkin, R., “Bounded Rationality, Standard Form Contracts, and Unconscionability”, The University of Chicago Law Review 70/2003.
  • Laibson, D., “Golden Eggs and Hyperbolic Discounting”, The Quarterly Journal of Economics 112(2)/1997.
  • Levin, I. P., Schneider, S. L., Gaeth, G. J., “All Frames Are Not Created Equal: A Typology and Critical Analysis of Framing Effects”, Organizational Behavior and Human Decision Processes 76(2)/1998.
  • Lusardi, A., Tufano, P., “Debt Literacy, Financial Experiences, and Overindebtedness”, Journal of Pension Eco-nomics & Finance 14(4)/2015.
  • Luth, H., Behavioural Economics in Consumer Policy: The Economic Analysis of Standard Terms in Consumer Contracts Revisited, Intersentia, Antwerp−Oxford 2010.
  • Marotta-Wurgler, F., “Does Contract Disclosure Matter?”, Journal of Institutional and Theoretical Econo-mics 168(1)/2012.
  • O’ Donoghue, T., Rabin, M., “Doing It Now or Later”, American Economic Review 89(1)/1999.
  • Parisi, F., The Language of Law and Economics: A Dictionary, Cambridge University Press, Cambridge 2013.
  • Posner, R. A., “Rational Choice, Behavioral Economics, and the Law”, Stanford Law Review 1551/1998.
  • Sa-Aadu, J., Sirmans, C. F., “Differentiated Contracts, Heterogeneous Borrowers, and the Mortgage Choice Deci-sion”, Journal of Money, Credit and Banking 27(2)/1995.
  • Schäfer, H. B., Leyens, P. C., “Judicial Control of Standard Terms and European Private Law–A Law & Econom-ics Perspective on the Draft Common Frame of Reference for a European Private Law”, 2009, http://ssrn.com/abstract=1520457.
  • Schwartz, A., Wilde, L. L., “Intervening in Markets on the Basis of Imperfect Information: A Legal and Economic Analysis”, U. Pa. L. Rev. 127/1978.
  • Simon, H. A., Models of Man Social and Rational, Mathematical Essays on Rational Human Behavior in a Social Setting, Wiley, New York 1957.
  • Smith, V. L., “The Borrower-Lender Relationship”, American Economic Review 66(3)/1976.
  • Stango, V., Zinman, J., “Fuzzy Math, Disclosure Regulation, and Market Outcomes: Evidence from Truth-in-Lending Reform”, The Review of Financial Studies 24(2)/2011.
  • Stanovich, K. E., West, R. F., “Individual Differences in Reasoning: Implications for the Rationality Debate?”, Be-havioral and brain sciences 23/2000.
  • Statman, M., Finance for Normal People: How Investors and Markets Behave, Oxford University Press, Oxford 2017.
  • Tversky, A., Kahneman, D., “Judgment Under Uncertainty: Heuristics and Biases”, Science 185/1974.
  • Woodward, S. E., “Consumer Confusion in the Mortgage Market”, 2003, http://ssrn.com/abstract=2049629.