We build a model of optimal fixed-rate mortgage refinancing with fixed costs and inattention and derive a new sufficient statistic that can be used to measure inattention frictions from simple moments of the rate gap distribution. In the model, borrowers pay attention to rates sporadically so they often fail to refinance even when it is profitable. When paying attention, borrowers optimally choose to refinance earlier than under a perfect attention benchmark. Our model can rationalize almost all errors of “omission” (refinancing too slowly) and a large fraction of the errors of “commission” (refinancing too quickly) previously documented in the data.
Acknowledgements and Disclosures
We would like to thank John Driscoll for helpful comments. Fabrice Tourre acknowledges financial support from the Bert and Sandra Wasserman endowment. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.