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Investment in Financial Literacy and Saving Decisions

  • Jappelli, Tullio
  • Padula, Mario

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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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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  1. Dimitris Christelis & Tullio Jappelli & Mario Padula, 2008. "Cognitive Abilities and Portfolio Choice," Working Papers 2008_19, Department of Economics, University of Venice "Ca' Foscari".
  2. Viola Angelini & Agar Brugiavini & Guglielmo Weber, 2009. "Ageing and unused capacity in Europe: is there an early retirement trap?," Economic Policy, CEPR;CES;MSH, vol. 24, pages 463-508, 07.
  3. Annamaria Lusardi & Olivia S. Mitchell, 2008. "Planning and Financial Literacy: How Do Women Fare?," American Economic Review, American Economic Association, vol. 98(2), pages 413-17, May.
  4. van Rooij, Maarten & Lusardi, Annamaria & Alessie, Rob, 2011. "Financial literacy and stock market participation," Journal of Financial Economics, Elsevier, vol. 101(2), pages 449-472, August.
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  7. Annamaria Lusardi & Pierre-Carl Michaud & Olivia S. Mitchell, 2013. "Optimal Financial Knowledge and Wealth Inequality," CeRP Working Papers 133, Center for Research on Pensions and Welfare Policies, Turin (Italy).
  8. Luigi Guiso & Tullio Jappelli, 2008. "Financial Literacy and Portfolio Diversification," Economics Working Papers ECO2008/31, European University Institute.
  9. Justine S. Hastings & Lydia Tejeda-Ashton, 2008. "Financial Literacy, Information, and Demand Elasticity: Survey and Experimental Evidence from Mexico," NBER Working Papers 14538, National Bureau of Economic Research, Inc.
  10. James Banks & Zoë Oldfield, 2006. "Understanding pensions: cognitive function, numerical ability and retirement saving," IFS Working Papers W06/05, Institute for Fiscal Studies.
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  12. van Rooij, Maarten C.J. & Lusardi, Annamaria & Alessie, Rob J.M., 2011. "Financial literacy and retirement planning in the Netherlands," Journal of Economic Psychology, Elsevier, vol. 32(4), pages 593-608, August.
  13. Campbell, John & Calvet, Lauren E. & Sodini, Paolo, 2009. "Measuring the Financial Sophistication of Households," Scholarly Articles 2618438, Harvard University Department of Economics.
  14. Alan L. Gustman & Thomas L. Steinmeier & Nahid Tabatabai, 2010. "Financial Knowledge and Financial Literacy at the Household Level," NBER Working Papers 16500, National Bureau of Economic Research, Inc.
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  19. Tullio Jappelli, 2010. "Economic Literacy: An International Comparison," Economic Journal, Royal Economic Society, vol. 120(548), pages F429-F451, November.
  20. Annamaria Lusardi & Olivia S. Mitchell, 2006. "Baby Boomer Retirement Security: The Roles of Planning, Financial Literacy, and Housing Wealth," CeRP Working Papers 54, Center for Research on Pensions and Welfare Policies, Turin (Italy).
  21. Charlotte Christiansen & Juanna Schröter Joensen & Jesper Rangvid, 2008. "Are Economists More Likely to Hold Stocks?," Review of Finance, European Finance Association, vol. 12(3), pages 465-496.
  22. Jappelli, Tullio & Padula, Mario, 2013. "Investment in financial literacy, social security and portfolio choice," CFS Working Paper Series 2013/12, Center for Financial Studies (CFS).
  23. Annamaria Lusardi & Olivia S. Mitchell & Vilsa Curto, 2009. "Financial Literacy among the Young: Evidence and Implications for Consumer Policy," NBER Working Papers 15352, National Bureau of Economic Research, Inc.
  24. Victor Stango & Jonathan Zinman, 2009. "Exponential Growth Bias and Household Finance," Journal of Finance, American Finance Association, vol. 64(6), pages 2807-2849, December.
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  27. Shawn Cole & Thomas Sampson & Bilal Zia, 2011. "Prices or Knowledge? What Drives Demand for Financial Services in Emerging Markets?," Journal of Finance, American Finance Association, vol. 66(6), pages 1933-1967, December.
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