Iscenko, Zanna; (2020) Methods for analysing consumer choice data and their applications to the UK mortgage market. Doctoral thesis (Ph.D), UCL (University College London).

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Abstract

This thesis uses a unique combination of administrative and commercial data on the UK mortgage market to study how consumers make decisions in complex settings that involve multi-dimensional pricing, restricted product availability (from eligibility criteria) and potential brand loyalty towards some of the suppliers. Chapter 2 develops a method for detecting apparently inefficient consumer decisions by identifying cases when the chosen product was strictly dominated by another available alternative. It finds that 30\% of UK borrowers in 2015-16 chose mortgages that were strictly dominated and incurred substantial avoidable costs as a result. It also describes how the propensity to make dominated choices varies with borrower demographics, product characteristics, and presence of any existing relationship between the borrower and product provider. Chapter 3 uses a structural approach to investigate these findings further. It applies a limited attention discrete choice model with two latent classes of borrowers to study which characteristics of suppliers and products affect (a) the likelihood of the alternative being considered and (b) preferences for the considered alternatives. It documents substantial inattention towards the available alternatives, which tends to be worse among the less financially sophisticated borrowers and finds that a borrower already holding another product with a lender significantly boosts that lender's probability of being considered. Even conditional on paying attention, all borrower types show a strong preference for lenders they are familiar with. The chapter also contains a counterfactual policy simulation of making all borrowers pay full attention and reports the effects in the new market equilibrium. Chapter 4 (joint work with Jeroen Nieboer at the Financial Conduct Authority), uses difference-in-difference matching to measure the effects of the introduction of mandatory mortgage advice in the UK in 2014 on the borrowing costs and chosen product characteristics of the previously non-advised borrowers.

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