Does It Pay to Read Your Junk Mail? Evidence of the Effect of Advertising on Financial Decisions∗

We examine the effect of direct mail (commonly referred to as junk mail) advertising on individual financial decisions by studying consumer choice of 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 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 revelent in explaining consumer contract choice, even though they were presented with a full menu of debt contracts. Our results are consistent with the persuasive view of advertising and suggest that advertising and persuasion can lead to suboptimal financial choices.