Industrial Organization of Financial Markets
Paper Session
Friday, Jan. 6, 2023 10:15 AM - 12:15 PM (CST)
- Chair: Jean-François Houde, University of Wisconsin-Madison
Search Frictions and Product Design in the Municipal Bond Market
Abstract
This paper shows that product attributes shape search frictions, and studies the incentives of intermediaries to leverage this channel to increase their rents in the context of the US municipal bond market. About half of municipal bonds are designed via negotiations between a local government and its underwriter, and they are traded in an over-the-counter market, where the underwriter often also acts as an intermediary. Exploiting variations in state regulations to limit government officials’ conflict of interests, we provide suggestive evidence that including special provisions to a bond decreases its liquidity and price, while it increases the market share of underwriters in the secondary market trades. Motivated by these findings, we build and estimate a model of bond origination and trades to quantify market inefficiency driven by underwriters’ dual role in both primary and secondary markets, as well as government officials’ conflict of interest, and discuss policy implications.Asymmetric Information in the Wholesale Market for Mortgages: The Case of Ginnie Mae Loans
Abstract
In this paper, we analyze the cost of financial intermediation services provided by traditional and shadow banks in the market for conforming mortgages (over 90% of loans in the US).1 Intermediation consists of three activities: (i) the acquisition of loans, (ii) the creation of MBS pools, and (iii) the servicing of these loans. The vast majority of conforming mortgage in the U.S. are supplied via this origin-to-distribute channel. Our focus is on the interaction between the wholesale and secondary markets. The goal of this paper is to examine and quantify the effects of adverse selection the cost of intermediation. We study the problem empirically by combining data on loan securitization and performance provided by Ginnie Mae, with proprietary data on loan acquisition in the wholesale market.Information Frictions in Mortgage Refinancing
Abstract
Households often fail to refinance mortgages, foregoing substantial savings in interest payments. We implement a large-scale experiment on all mortgage holders in a large Chilean bank to study whether light-touch informational interventions affect the incidence of refinancing and the extent of search. We randomly assign mortgage holders to receive one of five emails about their mortgage and track their search and refinancing behavior over time. These emails differ in the type and extent of the information provided and are each designed to target one possible behavioral friction leading to this inertia. We find that the most effective intervention---giving both information about savings and details of how to refinance---approximately doubles the incidence of refinancing requests, with significantly larger effects for those who would save the most from doing so. Using a simple framework, we discuss the implications of information and search frictions for mortgage rate markups and the passthrough of monetary policy.Discussant(s)
Claudia Robles-Garcia
,
Stanford University
Milena Wittwer
,
Boston College
Jakub Kastl
,
Princeton University
Jason Allen
,
Bank of Canada
JEL Classifications
- D82 - Asymmetric and Private Information; Mechanism Design
- G23 - Non-bank Financial Institutions; Financial Instruments; Institutional Investors