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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 underestate the impact of financial literacy on saving.

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Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2011/07.

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Date of creation: 2011
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Handle: RePEc:zbw:cfswop:201107
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  1. Lusardi, Annamaria & Mitchell, Olivia S., 2007. "Baby Boomer retirement security: The roles of planning, financial literacy, and housing wealth," Journal of Monetary Economics, Elsevier, vol. 54(1), pages 205-224, January.
  2. Hanushek, Eric A. & Wößmann, Ludger, 2008. "The role of cognitive skills in economic development," Munich Reprints in Economics 20454, University of Munich, Department of Economics.
  3. Lusardi, Annamaria & Mitchell, Olivia S., 2008. "Planning and financial literacy: How do women fare?," CFS Working Paper Series 2008/03, Center for Financial Studies (CFS).
  4. James Banks & Cormac O'Dea & Zoë Oldfield, 2010. "Cognitive Function, Numeracy and Retirement Saving Trajectories," Economic Journal, Royal Economic Society, vol. 120(548), pages F381-F410, November.
  5. 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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  7. Luigi Guiso & Tullio Jappelli, 2009. "Financial Literacy and Portfolio Diversification," CSEF Working Papers 212, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  8. Orazio P. Attanasio & Guglielmo Weber, 1993. "Consumption Growth, the Interest Rate and Aggregation," Review of Economic Studies, Oxford University Press, vol. 60(3), pages 631-649.
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  12. Charlotte Christiansen & Juanna Schröter Joensen & Jesper Rangvid, 2007. "Are Economists More Likely to Hold Stocks?," CREATES Research Papers 2007-08, Department of Economics and Business Economics, Aarhus University.
  13. David Card, 2000. "Estimating the Return to Schooling: Progress on Some Persistent Econometric Problems," NBER Working Papers 7769, National Bureau of Economic Research, Inc.
  14. Victor Stango & Jonathan Zinman, 2009. "Exponential Growth Bias and Household Finance," Journal of Finance, American Finance Association, vol. 64(6), pages 2807-2849, December.
  15. 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.
  16. 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.
  17. Lusardi, Annamaria & Mitchell, Olivia S. & Curto, Vilsa, 2010. "Financial literacy among the young: Evidence and implications for consumer policy," CFS Working Paper Series 2010/09, Center for Financial Studies (CFS).
  18. Maarten van Rooij & Annamaria Lusardi & Rob J. Alessie, 2011. "Financial Literacy, Retirement Planning, and Household Wealth," NBER Working Papers 17339, National Bureau of Economic Research, Inc.
  19. 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).
  20. Maarten van Rooij & Annamaria Lusardi & Rob Alessie, 2009. "Financial Literacy and Retirement Planning in the Netherlands," DNB Working Papers 231, Netherlands Central Bank, Research Department.
  21. Dimitrios Christelis & Tullio Jappelli & Mario Padula, 2006. "Cognitive Abilities and Portfolio Choice," CSEF Working Papers 157, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  22. Jappelli, Tullio, 2010. "Economic literacy: An international comparison," CFS Working Paper Series 2010/16, Center for Financial Studies (CFS).
  23. Pamela Herd & Karen Holden & Yung Ting Su, 2012. "The Links between Early-Life Cognition and Schooling and Late-Life Financial Knowledge," Journal of Consumer Affairs, Wiley Blackwell, vol. 46(3), pages 411-435, 09.
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  27. repec:ecj:econjl:v:122:y:2012:i::p:449-478 is not listed on IDEAS
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  30. 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.
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