Time Preferences and Mortgage Choice

Mortgage decisions have important consequences for consumers, lenders, and the state of the economy more generally. Mortgage decisions are also prototypical of consumer financial choices that involve a stream of expenditures and consumption occurring across time. The authors use heterogeneity in tim...

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Bibliographic Details
Published inJournal of marketing research Vol. 54; no. 3; pp. 415 - 429
Main Authors ATLAS, STEPHEN A., JOHNSON, ERIC J., PAYNE, JOHN W.
Format Journal Article
LanguageEnglish
Published Los Angeles, CA American Marketing Association 01.06.2017
SAGE Publications
SAGE PUBLICATIONS, INC
Subjects
Bias
Consumer behavior
Consumers
Decision making
Foreclosure
Housing prices
Lenders
Mortgages
Studies
Time
time preferences
mortgage defaults
mortgage choice
individual differences
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Summary:Mortgage decisions have important consequences for consumers, lenders, and the state of the economy more generally. Mortgage decisions are also prototypical of consumer financial choices that involve a stream of expenditures and consumption occurring across time. The authors use heterogeneity in time preferences for both immediate (present bias) and long-term outcomes to explain a sequence of mortgage decisions, including mortgage choice and the decision to abandon a mortgage. The authors employ an analytic model and a survey of mortgaged households augmented by zip code-level house price and foreclosure data. The model suggests and data confirm that consumers with greater present bias and long-term discounting tend to choose mortgages that minimize up-front costs. However, greater present bias decreases homeowners' willingness to abandon a mortgage, locking them into the contract. Long-term patience increases mortgage abandonment. This reversal across mortgage decisions is difficult for alternative accounts to explain. These results suggest that a two-parameter model of time preferences is helpful for understanding how homeowners make mortgage decisions.
ISSN:0022-2437
1547-7193
DOI:10.1509/jmr.14.0481