Working Paper: CEPR ID: DP8220
Authors: Tullio Jappelli; Mario Padula
Abstract: 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.
Keywords: financial literacy; human capital; saving
JEL Codes: D8; E2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial literacy and wealth (G53) | joint determination (D79) |
| financial literacy (G53) | wealth accumulation (E21) |
| initial stock of financial literacy (G53) | current financial literacy (G53) |
| financial literacy (G53) | saving behavior (D14) |
| wealth (D14) | saving behavior (D14) |
| financial literacy (G53) | access to better investment opportunities (G11) |
| access to better investment opportunities (G11) | returns on savings (D14) |
| financial literacy (G53) | saving rates (E43) |