Recent Award

Doctoral Dissertation Research in Economics: Reference Dependence and Option Adjustable Rate Mortgages

This awards funds data expenses for dissertation research. The project focuses on how homeowners who hold 'Option ARM' mortgages make financial decisions. The goal is to determine whether or not these homeowners are using so-called reference points in making their decisions about how to pay down credit card debt while also making mortgage payments. The results of this project are relevant to many issues surrounding financial regulation, and will illuminate debates about whether or not the government should restrict complexity in mortgage products, require certain kinds of disclosure information from lenders, or even ban 'non-standard' mortgages all together. The work will also help educators who work to promote financial literacy; the design of consumer education programs will benefit from better information about the reasons why consumers make certain kinds of financial mistakes.

The coPI plans to determine whether borrowers who hold Option ARMs make financial mistakes (a) statically, by holding credit card debt at the same time they make larger-than-necessary mortgage payments, and (b) over time, by failing to allocate payments over time in response to plausibly exogenous shocks to interest rates. He hypothesizes that these mistakes are due to reference dependent preferences over debts. A natural reference point exists for an Option ARM because the monthly statement includes a non-binding suggestion of 'interest-only' payment. The analysis will first provide descriptive evidence on the importance of the interest only payments by examining the distribution of mortgage payments relative to the reference point. The PI will then explicitly test a model of reference dependence against a standard dynamic model.

Principal Investigator: 

Bernard Salanie

Professor of Economics; Chair, Department of Economics

Home Department: 

Date: 

Monday, August 15, 2016 to Monday, July 31, 2017

Research Category: 

Amount: 

$24,000

Newsletter

Don't want to miss our interesting news and updates! Make sure to join our newsletter list.

Contact us

For general questions about ISERP programs, services, and events.