Interest Deductibility, Market Frictions, and Price Discrimination.

58 Pages Posted: 19 Jan 2021 Last revised: 31 Aug 2021

See all articles by Maxence Valentin

Maxence Valentin

Pennsylvania State University - Department of Insurance & Real Estate

Date Written: August 31, 2021

Abstract

This study demonstrates that loan originators extract a share of the interest deductibility subsidy through higher interest rates. It shows that borrowers who deduct mortgage interest payments pay an interest rate that is on average 11.6 basis points higher than that of otherwise similar borrowers. Consistent with a model of first-degree price discrimination, this additional markup increases with borrowers' marginal tax rate and with market frictions, including originators' concentration, search cost, and leverage in bargaining. The results suggest that interest deductibility functions as price support in credit markets characterized by high market frictions.

Keywords: Interest deductibility, credit markets, mortgage, subsidy incidence

JEL Classification: G21, G51, H24, H31, R28

Suggested Citation

Valentin, Maxence, Interest Deductibility, Market Frictions, and Price Discrimination. (August 31, 2021). Available at SSRN: https://ssrn.com/abstract=3763880 or http://dx.doi.org/10.2139/ssrn.3763880

Maxence Valentin (Contact Author)

Pennsylvania State University - Department of Insurance & Real Estate ( email )

University Park, PA 16802-3306
United States

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