Working Paper: NBER ID: w22025
Authors: John Y. Campbell
Abstract: This lecture considers the case for consumer financial regulation in an environment where many households lack the knowledge to manage their financial affairs effectively. The lecture argues that financial ignorance is pervasive and unsurprising given the complexity of modern financial products, and that it contributes meaningfully to the evolution of wealth inequality. The lecture uses a stylized model to discuss the welfare economics of paternalistic intervention in financial markets, and discusses several specific examples including asset allocation in retirement savings, fees for unsecured short-term borrowing, and reverse mortgages.
Keywords: consumer financial regulation; financial ignorance; wealth inequality; paternalistic intervention; household finance
JEL Codes: D12; D18; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial ignorance (G53) | Poor financial decisions (G51) |
| Poor financial decisions (G51) | Lower individual welfare (D69) |
| Financial ignorance (G53) | Wealth inequality (D31) |
| Complexity of financial products (G19) | Financial ignorance (G53) |
| Regulatory interventions (G18) | Improved consumer outcomes (D18) |