Does It Pay to Read Your Junk Mail? Evidence of the Effect of Advertising on Home Equity Credit Choices (REVISED, November 2008)
The authors examine the effect of direct mail (commonly referred to as junk mail) advertising on individual financial decisions by studying consumer choice of home equity debt contracts. Consistent with the theoretical predictions, they find that financial variables underlying the relative pricing of debt contracts are the leading factors explaining consumers home equity debt choice. Furthermore, they also find that the intended use of debt proceeds significantly impacts consumer choice. However, when the authors study a subset of consumers who received a direct mail solicitation for a particular debt contract (fixed- versus adjustable-rate), the authors find evidence that the relative pricing variables are less relevant in explaining consumer contract choice, even though the variables were presented with a full menu of debt contracts. Thus, our results are consistent with the persuasive view of advertising.