In Search of a Risk‐Free Asset: Search Costs and Sticky Deposit Rates

Abstract

AbstractI examine the role of costly consumer search for the pricing of deposits. Estimates of a model of heterogeneous search cost households reveal a large fraction of high‐search‐cost depositors composed of elderly and less financially sophisticated households. Those households grant banks significant monopoly power that results in low and asymmetric interest rate pass‐through. The predictions of the estimated model are consistent with responses in the Survey of Consumer Finances to questions related to financial sophistication, search for investment return, and deposit allocations across multiple bank accounts. The estimated model also reveals a nonmonotone relationship between bank entry, deposit rates, and consumer surplus.