Electronic copy

Abstract: We derive the first closed-form optimal refinancing rule: Refinance when the current mortgage interest rate falls below the original rate by at least In this formula W (.) is the Lambert W -function, ρ is the real discount rate, λ is the expected real rate of exogenous mortgage repayment, σ is the standard deviation of the mortgage rate, κ/M is the ratio of the tax-adjusted refinancing cost and the remaining mortgage value, and τ is the marginal tax rate. This expression is derived by solving a tractable class of refinancing problems. Our quantitative results closely match those reported by researchers using numerical methods. JEL classification: G11, G21

Unshrouding Effects on Demand for a Costly Add-On: Evidence from Bank Overdrafts in Turkey

Models of shrouding predict that firms lack incentives to compete on add-on prices. Working with a large Turkish bank to test SMS direct marketing promotions to 108,000 existing checking account holders, we find that messages promoting a large discount on the overdraft interest rate reduce overdraft usage. In contrast, messages that mention overdraft availability without mentioning price increase usage. Neither change persists long after messages stop, suggesting that induced overdrafting is not habit-forming. Our results are consistent with a model of limited memory and attention

The Evolutionary Path of the Law

What lessons can legal scholars learn from the life and work of W. D. "Bill" Hamilton, a lifelong student of nature? From my small corner of the legal Academia, three aspects of Bill Hamilton’s work in evolutionary biology stand out in particular: (i) Hamilton’s simple and beautiful model of social behavior in terms of costs and benefits; (ii) his fruitful collaboration with the political theorist Robert Axelrod and their unexpected yet elegant solution of the Prisoner’s Dilemma, an important game or puzzle that had defied solution until Hamilton and Axelrod came along; and (iii) Hamilton’s conception of science generally -- and in particular his view of the process of scientific justification -- as a form of trial advocacy. In this review of Ullica Segerstråle’s recently-published biography of Bill Hamilton, the author briefly recounts and reviews each one of these important contributions