Time preferences and mortgage choice


Journal Article

© 2017, American Marketing Association. 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.

Full Text

Duke Authors

Cited Authors

  • Atlas, SA; Johnson, EJ; Payne, JW

Published Date

  • June 1, 2017

Published In

Volume / Issue

  • 54 / 3

Start / End Page

  • 415 - 429

International Standard Serial Number (ISSN)

  • 0022-2437

Digital Object Identifier (DOI)

  • 10.1509/jmr.14.0481

Citation Source

  • Scopus