The Cost of Steering in Financial Markets: Evidence from the Mortgage Market

Many households lack sophistication required to make complex financial decisions and can be steered by intermediaries to certain financial products via advice, advertisement, shrouding, etc. We build a model of the mortgage market in which banks attain their op- timal mortgage portfolio by both setting rates and steering their clientele. “Sophisticated” households know which mortgage type is best for them; “naive” are susceptible to bank’s steering. Using data on the universe of Italian mortgages, we estimate the model and quan- tify the welfare implications of steering in this market. The average cost of the distortion is equivalent to an increase in the annual mortgage payment by 11%. However, since steering often also conveys information about mortgages, restricting steering results in a loss of 998 euros per year on average. A financial literacy campaign is beneficial for naive households, but hurts sophisticated ones.