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Optimal Financial Literacy and Saving for Retirement

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  • Annamaria Lusardi
  • Pierre-Carl Michaud
  • Olivia S. Mitchell

Abstract

Recent studies show that financial literacy is strongly positively related to household wealth, but there is also substantial cross-sectional variation in both financial literacy and wealth levels. To explore these patterns, the authors develop a calibrated stochastic life cycle model which features endogeneous financial literacy accumulation. Their model generates substantial wealth inequality, over and above what standard lifecycle models produce. This is due to the fact that higher earners typically have more hump-shaped labor income profiles and lower retirement benefits which, when interacted with the precautionary saving motive, boosts their need for private wealth accumulation and thus financial literacy. They show that the fraction of the population which is rationally "financially ignorant" depends on the level of labor income uncertainty as well as the generosity of the retirement system.

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Bibliographic Info

Paper provided by RAND Corporation Publications Department in its series Working Papers with number 905.

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Length: 41 pages
Date of creation: Sep 2011
Date of revision:
Handle: RePEc:ran:wpaper:905

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  1. Imai, Kosuke & van Dyk, David A., 2005. "A Bayesian analysis of the multinomial probit model using marginal data augmentation," Journal of Econometrics, Elsevier, vol. 124(2), pages 311-334, February.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Why the rich save more
    by Economic Logician in Economic Logic on 2012-04-11 14:47:00
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Cited by:
  1. Thomas Lalime & Pierre-Carl Michaud, 2012. "Littératie financière et préparation à la retraite au Québec et dans le reste du Canada," Cahiers de recherche 1237, CIRPEE.
  2. Caliendo, Frank N. & Findley, T. Scott, 2013. "Time inconsistency and retirement planning," Economics Letters, Elsevier, vol. 121(1), pages 30-34.
  3. Annamaria Lusardi, 2011. "Americans' Financial Capability," NBER Working Papers 17103, National Bureau of Economic Research, Inc.

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