Discussion Paper Details

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Title: Investment in Financial Literacy and Saving Decisions

Author(s): Tullio Jappelli and Mario Padula

Publication Date: February 2011

Keyword(s): Financial Literacy, Human Capital and Saving

Programme Area(s): Financial Economics and International Macroeconomics

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.

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Bibliographic Reference

Jappelli, T and Padula, M. 2011. 'Investment in Financial Literacy and Saving Decisions'. London, Centre for Economic Policy Research.