How to Reduce Inertia of Private Investors?

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

Topic & Objectives

This project investigates inertia within and across banks in retail deposit markets using detailed panel data on consumer choices and account characteristics. 

Key Findings

  • 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.

Policy Implications

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/s Title Year Research Area Keywords
223 Florian Deuflhard Quantifying Inertia in Retail Deposit Markets 2018 Household Finance

 

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