The effect of focusing on loan decisions

Bakó, Barna and Neszveda, Gábor (2015) The effect of focusing on loan decisions. Working Paper. Department of Microeconomics, Corvinus University of Budapest. (Submitted)

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In this paper we investigate some implications of recent results about salience on loan decisions. Using the framework of focus-weighted utility we show that consumers might take out loans even when that yield them negative utility. We claim however, that consumers are more prudent in their decisions and might be less likely to take out such loans when the usual fixed- and increasing-installment plans are coupled with a decreasing-installment option. We argue that harmful loan consumption, especially in the case of loans with increasing-installments (e.g. alternative mortgage loans), could be decreased if a policy would prescribe presentation of loan repayment schedules in a way that employs this effect. Moreover, using the model of focus-weighted utility we give a possible explanation for the unpopularity of decreasing-installment plans, the success of increasing-installment plans and their higher default rate during the financial crisis.

Item Type:Monograph (Working Paper)
Uncontrolled Keywords:focus weighted utility, loan decisions, welfare analysis
JEL classification:D03 - Behavioral Microeconomics: Underlying Principles
Projects:MTA-BCE 'Lendulet" Strategic Interactions Research Group
ID Code:1999
Deposited By: Barna Bakó
Deposited On:28 Jul 2015 09:49
Last Modified:28 Jul 2015 09:49

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