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Investment in Financial Literacy and Saving Decisions

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  • Jappelli, Tullio
  • Padula, Mario

Abstract

We present an intertemporal consumption model of consumer investment in financial literacy. Consumers benefit from such investment because their stock of financial literacy allows them to increase the returns on their wealth. Since literacy depreciates over time and has a cost in terms of current consumption, the model determines an optimal investment in literacy. The model shows that financial literacy and wealth are determined jointly, and are positively correlated over the life cycle. Empirically, the model leads to an instrumental variables approach, in which the initial stock of financial literacy (as measured by math performance in school) is used as an instrument for the current stock of literacy. Using microeconomic and aggregate data, we find a strong effect of financial literacy on wealth accumulation and national saving, and also show that ordinary least squares estimates understate the impact of financial literacy on saving.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8220.

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Date of creation: Feb 2011
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Handle: RePEc:cpr:ceprdp:8220

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Keywords: Financial Literacy; Human Capital; Saving;

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