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Investment in financial literacy, social security and portfolio choice

Author

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  • Jappelli, Tullio
  • Padula, Mario

Abstract

We present an intertemporal portfolio choice model where individuals invest in financial literacy, save, allocate their wealth between a safe and a risky asset, and receive a pension when they retire. Financial literacy affects the excess return and the cost of stock market participation. Since literacy depreciates over time and has a cost related to current consumption, investors simultaneously choose how much to save, the portfolio allocation, and the optimal investment in literacy. This last depends on households' resources, its preference parameters and on how much financial literacy affects the returns on risky assets and the stock market participation cost, and the returns on social security wealth. The model implies one should observe a positive correlation between stock market participation (and risky asset share, conditional on participation) and financial literacy, and a negative correlation between the generosity of the social security system and financial literacy. The model also implies that the stock of financial literacy accumulated early in life is positively correlated with the individual's wealth and portfolio allocations later in life. Using microeconomic cross-country data, we find support for these predictions.

Suggested Citation

  • 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).
  • Handle: RePEc:zbw:cfswop:201312
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    Cited by:

    1. Jappelli, Tullio & Padula, Mario, 2013. "Investment in financial literacy and saving decisions," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2779-2792.
    2. Khalily, M. A. Baqui, 2016. "Financial Inclusion, Financial Regulation, and Education in Bangladesh," ADBI Working Papers 621, Asian Development Bank Institute.
    3. Arrondel, L. & Debbich, M. & Savignac, F., 2013. "Financial Literacy and Financial Planning in France," Working papers 465, Banque de France.
    4. Bucher-Koenen, Tabea & Lamla, Bettina, 2014. "The long Shadow of Socialism: On East-West German Differences in Financial Literacy," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100585, Verein für Socialpolitik / German Economic Association.
    5. Samuele Murtinu & Giulio Piccirilli & Agnese Sacchi, 2016. "Fiscal Policy, Government Polarization, and the Economic Literacy of Voters," Working papers 50, Società Italiana di Economia Pubblica.
    6. Cumurovic, Aida & Hyll, Walter, 2016. "Financial Literacy and Self-Employment," Annual Conference 2016 (Augsburg): Demographic Change 145732, Verein für Socialpolitik / German Economic Association.
    7. Adnan Balloch & Anamaria Nicolae & Dennis Philip, 2015. "Stock Market Literacy, Trust, and Participation," Review of Finance, European Finance Association, vol. 19(5), pages 1925-1963.
    8. Ćumurović, Aida & Hyll, Walter, 2016. "Financial Literacy and Self-employment," IWH Discussion Papers 11/2016, Halle Institute for Economic Research (IWH).
    9. repec:spr:jbecon:v:87:y:2017:i:5:d:10.1007_s11573-017-0853-9 is not listed on IDEAS
    10. repec:mea:meawpa:14282 is not listed on IDEAS
    11. Nicola Branzoli, 2016. "Price dispersion and consumer inattention: evidence from the market of bank accounts," Temi di discussione (Economic working papers) 1082, Bank of Italy, Economic Research and International Relations Area.

    More about this item

    Keywords

    Financial Literacy; Portfolio Choice; Saving;

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G1 - Financial Economics - - General Financial Markets
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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