Time preferences and mortgage choice
Document Type
Article
Date of Original Version
6-1-2017
Abstract
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.
Publication Title, e.g., Journal
Journal of Marketing Research
Volume
54
Issue
3
Citation/Publisher Attribution
Atlas, Stephen A., Eric J. Johnson, and John W. Payne. "Time preferences and mortgage choice." Journal of Marketing Research 54, 3 (2017): 415-429. doi: 10.1509/jmr.14.0481.