Abstract:

The extent of price dispersion in the US residential mortgage market cannot be fully explained by dispersion in conventionally measured creditworthiness. Using a merged survey and administrative dataset with data on consumer search intensity, I show that consumer failure to recall the interest rate is associated with paying a much higher rate. I estimate a structural model of sequential search in which recall/non-recall of the interest rate forms a consumer type known to firms. Price discrimination explains 90 percent of the interest rate penalty paid by the inattentive consumer type, with differences in consumer preferences and search behavior explaining the remainder.