What’s the Catch? Suspicion of Bank Motives and Sluggish Refinancing

Abstract

Failing to refinance a mortgage can cost a borrower thousands of dollars. Based on administrative data from a large financial institution, we show that around 50% of borrowers leave thousands of dollars on the table by not refinancing. Survey data indicate that, among all the behavioral factors examined, only suspicion of banks’ motives is consistently related to the probability of accepting a refinancing offer. Finally, we report the results of three field experiments showing that enticing offers made by banks fail to increase participation and may even deepen suspicion. Our findings highlight the important role of trust in financial decisions. Received July 12, 2017; editorial decision April 3, 2018 by Editor Andrew Karolyi. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.