Investment in Financial Literacy and Saving Decisions
AbstractWe 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 InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8220.
Date of creation: Feb 2011
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Other versions of this item:
- Jappelli, Tullio & Padula, Mario, 2013. "Investment in financial literacy and saving decisions," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2779-2792.
- Jappelli, Tullio & Padula, Mario, 2011. "Investment in financial literacy and saving decisions," CFS Working Paper Series 2011/07, Center for Financial Studies (CFS).
- Tullio Jappelli & Mario Padula, 2011. "Investment in Financial Literacy and Saving Decisions," CSEF Working Papers 272, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- E2 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment
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