How to Reduce Inertia of Private Investors?

Project Start:01/2018
Researchers:Florian Deuflhard, Roman Inderst
Category: Household Finance
Funded by:LOEWE

With data from the Dutch market that are linked with household panel data from the Dutch central bank, we plan to empirically investigate the "inertia" of customers of overnight money or equivalent deposits should be investigated empirically. In addition to a reduced form estimate, a structural demand model will be estimated. This allows a counterfactual analysis for a possible policy intervention, reducing the estimated "inertia", for example by reducing switching costs.


This paper investigates inertia within and across banks in retail deposit markets using detailed panel data on consumer choices and account characteristics. In a structural choice model, I find that costs of inertia are around one third higher for switching accounts across compared to switching within banks. Observable proxies of bank-level switching costs (number and type of additional financial products) explain most of this cost premium, while online banking usage reduces inertia. Consistent with theory,

I provide evidence that banks incorporate inertia in their pricing as older accounts pay lower rates than comparable newer accounts. Counterfactual policies reducing inertia shift market share to more competitive smaller banks but only eliminating inertia within banks already results in high potential gains in consumer surplus. This suggests that facilitating bank switching alone might be insufficient to improve consumer choices.

Related Working Papers

No.Author/sTitleYearProgram AreaKeywords
223Florian DeuflhardQuantifying Inertia in Retail Deposit Markets2018 Household Finance