Optimal Financial Knowledge and Wealth Inequality
AbstractWhile financial knowledge is strongly positively related to household wealth, there is also considerable cross-sectional variation in both financial knowledge and net asset levels. To explore these patterns, we develop a calibrated stochastic life cycle model featuring endogenous financial knowledge accumulation. The model generates substantial wealth inequality, over and above that of standard life cycle models; this is because higher earners typically have more hump-shaped labor income profiles and lower retirement benefits which, when interacted with precautionary saving motives, boost their need for private wealth accumulation and thus financial knowledge. Our simulations show that endogenous financial knowledge accumulation has the potential to account for a large proportion of wealth inequality. The fraction of the population which is rationally financially “ignorant” depends on the generosity of the retirement system and the level of means-tested benefits. Educational efforts to enhance financial savvy early in the life cycle so as to produce one percentage point excess return per year would be valued highly by people in all educational groups.
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Bibliographic InfoPaper provided by Center for Research on Pensions and Welfare Policies, Turin (Italy) in its series CeRP Working Papers with number 133.
Length: 59 pages
Date of creation: Mar 2013
Date of revision:
Other versions of this item:
- D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
- D1 - Microeconomics - - Household Behavior
- D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
- E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- G1 - Financial Economics - - General Financial Markets
This paper has been announced in the following NEP Reports:
- NEP-AGE-2013-05-22 (Economics of Ageing)
- NEP-ALL-2013-05-22 (All new papers)
- NEP-DGE-2013-05-22 (Dynamic General Equilibrium)
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- Jappelli, Tullio & Padula, Mario, 2013.
"Consumption Growth, the Interest Rate, and Financial Literacy,"
CEPR Discussion Papers
9406, C.E.P.R. Discussion Papers.
- Tullio Jappelli & Mario Padula, 2013. "Consumption Growth, the Interest Rate, and Financial Literacy," CSEF Working Papers 329, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
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