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The nonlinear effect of financial literacy on wealth: evidence from Germany

Author

Listed:
  • Jia Hou

    (Shenzhen University)

  • Sebastian Schuler

    (Deloitte GmbH)

Abstract

This paper investigates the nonlinearity in the relationship of financial literacy and wealth and addresses the potentially inadequate measurement of financial literacy. Using data from the Panel on Household Finances, a nationally representative survey for Germany, we show a positive relationship between financial literacy and wealth that declines in wealth. Among households with positive wealth, which constitute approximately 94% of the observations in the sample and represent 91% of the whole population, we find the highest positive correlation at the 5th percentile of wealth. Furthermore, we provide evidence that the current measurement of financial literacy may not be adequate to differentiate among households above approximately the 80th percentile of wealth. By exploiting an additional question on the compound interest rate, we highlight the sensitivity of the coefficients of interest to the measurement of financial literacy.

Suggested Citation

  • Jia Hou & Sebastian Schuler, 2022. "The nonlinear effect of financial literacy on wealth: evidence from Germany," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 49(3), pages 627-661, August.
    • Handle: RePEc:kap:empiri:v:49:y:2022:i:3:d:10.1007_s10663-022-09541-0
    DOI: 10.1007/s10663-022-09541-0
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    Cited by:

    1. Thomas Hammer & Alexander Zureck, 2022. "Analysis of Financial Literacy among High school students, graduates, and young professionals in German," Entrepreneurship and Sustainability Issues, VsI Entrepreneurship and Sustainability Center, vol. 10(2), pages 23-42, December.

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    More about this item

    Keywords

    Financial literacy; Household wealth; Inadequate measurement;
    All these keywords.

    JEL classification:

    • G53 - Financial Economics - - Household Finance - - - Financial Literacy
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

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