Banking Competition and Shrouded Attributes : Evidence from the US Mortgage Market

We document that banking deregulation leads banks to offer lower initial rates on adjustable-rate mortgages to attract borrowers, but banks also shroud these contracts by increasing back-loaded resetting rates. More shrouding can be explained by higher proportion of naïve borrowers following the deregulation and banks shroud more where there are more naïve borrowers. These results support the theory that sophisticated firms can exploit consumer biases by designing exploitative contracts. Although competition reduces firm revenues and benefits consumers initially, shrouding helps banks offset the vast majority of the initial losses