Interest Deductibility, Market Frictions, and Price Discrimination.
58 Pages Posted: 19 Jan 2021 Last revised: 31 Aug 2021
Date Written: August 31, 2021
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
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