Working Papers

Present Bias and Mortgage Refinancing Decisions

Job market paper

Abstract: This paper studies the optimal mortgage refinancing problem of a household subject to present bias and limited attention. I derive the first closed-form optimal refinancing rule accounting for these frictions and estimate the model with Danish administrative data. The estimated model explains observed delays in refinancing and shows that this behavior is consistent with substantial present bias: The average household has a short-run discount factor of beta=0.39. Present bias is stronger among older, less educated, financially wealthier, and higher-income households, while greater housing wealth and financial literacy mitigate it. I discuss the implications of my findings for the refinancing channel of monetary policy transmission.

Property Taxes and Housing Allocation Under Financial Constraints

with Joshua Coven, Arpit Gupta, and Abdoulaye Ndiaye

Revise and resubmit, American Economic Review  

Abstract: Low property taxes amplify lock-in effects for elderly homeowners, limiting housing access for young families. Higher property taxes function as "embedded leverage," reducing required down payments through a capitalization effect and enabling greater homeownership among younger households. Our overlapping generations model shows that raising California's property taxes to Texas levels would increase homeownership by six percentage points and young household ownership by eight percentage points. Conversely, higher capital gains taxes worsen lock-in effects and reduce young homeownership. Asset taxes can effectively reallocate housing to higher-valuation households when financial constraints exist, providing an independent justification for property taxation policies.

Consumption and Mortgage Interest Rates

with Steffen Andersen and Kasper Meisner Nielsen

Abstract: We study the transmission of monetary policy through changes in mortgage interest rates to consumption. We estimate a marginal propensity to consume (MPC) out of interest savings of around 1, which is significantly higher than the estimated MPC out of disposable income of 0.25 to 0.3. We decompose the consumption response by consumption categories and their contribution to economic activity, measured by output multipliers and employment multipliers. We find larger MPC for products with below median contribution to economic activity. Overall, our findings uncover novel insights regarding the role of households in the transmission of monetary policy.

Rational Attention Allocation in the Mortgage Market

with Mick Schaefer and Alexander Szimayer

Abstract: We propose a structural mortgage prepayment model, where mortgage holders have to allocate costly attention to implement prepayment decisions, and apply the model to US prime mortgages. Our empirical results suggest that commonly observed refinancing mistakes, such as choosing a financially suboptimal refinancing rate by waiting for too long, can be optimal responses of borrowers who allocate their attention rationally. We find that financial sophistication and experience in refinancing reduce costs for attention, while additional financial obligations cause the opposite. Compared to a situation without costs for attention, we estimate that the rational allocation of costly attention increases the value of liabilities by $4,214 for a median mortgage. We find that after the Great Financial Crisis, both the costs for attention as well as the impact of financial sophistication, experience in refinancing and additional financial obligations on the costs for attention increase. The increase of the costs for attention leads to an additional increase of the value of liabilities of 15% after the Great Financial Crisis. Our results have implications for the effectiveness of monetary policy transmission, especially, following an economic crisis.