Does it Pay to Read Your Junk Mail? Evidence of the Effect of Advertising on Home Equity Credit Choices

60 Pages Posted: 17 Nov 2008 Last revised: 14 Dec 2008

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Brent W. Ambrose

Pennsylvania State University

Date Written: November 21, 2008

Abstract

We 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, we find that financial variables underlying the relative pricing of debt contracts are the leading factors explaining consumers home equity debt choice. Furthermore, we also find that the intended use of debt proceeds significantly impacts consumer choice. However, when we study a subset of consumers who received a direct mail solicitation for a particular debt contract (fixed versus adjustable-rate), we find evidence that the relative pricing variables are less relevent in explaining consumer contract choice, even though they were presented with a full menu of debt contracts. Thus, our results are consistent with the persuasive view of advertising.

Keywords: Persuasion, Advertising, Contract Choice, Home-equity Lending

JEL Classification: D10, E210, G210

Suggested Citation

Agarwal, Sumit and Ambrose, Brent W., Does it Pay to Read Your Junk Mail? Evidence of the Effect of Advertising on Home Equity Credit Choices (November 21, 2008). FRB of Chicago Working Paper No. 2008-09. Available at SSRN: https://ssrn.com/abstract=1301078 or http://dx.doi.org/10.2139/ssrn.1301078

Sumit Agarwal (Contact Author)

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

HOME PAGE: http://www.ushakrisna.com

Brent W. Ambrose

Pennsylvania State University ( email )

University Park, PA 16802-3306
United States
814-867-0066 (Phone)
814-865-6284 (Fax)

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