Optimal Financial Literacy and Saving for Retirement
- 3 September 2011
- preprint
- Published by Elsevier BV in SSRN Electronic Journal
Abstract
Recent studies show that financial literacy is strongly positively related to household wealth, but there is also substantial cross-sectional variation in both financial literacy and wealth levels. To explore these patterns, the authors develop a calibrated stochastic life cycle model which features endogeneous financial literacy accumulation. Their model generates substantial wealth inequality, over and above what standard lifecycle models produce. This is due to the fact that higher earners typically have more hump-shaped labor income profiles and lower retirement benefits which, when interacted with the precautionary saving motive, boosts their need for private wealth accumulation and thus financial literacy. They show that the fraction of the population which is rationally "financially ignorant" depends on the level of labor income uncertainty as well as the generosity of the retirement system.Keywords
This publication has 39 references indexed in Scilit:
- Financial Literacy, Schooling, and Wealth AccumulationPublished by National Bureau of Economic Research ,2010
- The Age of Reason: Financial Decisions over the Life Cycle and Implications for RegulationBrookings Papers on Economic Activity, 2009
- Down or Out: Assessing the Welfare Costs of Household Investment MistakesJournal of Political Economy, 2007
- Household FinanceThe Journal of Finance, 2006
- Wealth Accumulation Over the Life Cycle and Precautionary SavingsJournal of Business & Economic Statistics, 2003
- Strategic Asset AllocationPublished by Oxford University Press (OUP) ,2002
- What Accounts for the Variation in Retirement Wealth Among U.S. Households?American Economic Review, 2001
- The Hyperbolic Consumption Model: Calibration, Simulation, and Empirical EvaluationJournal of Economic Perspectives, 2001
- Humps and Bumps in Lifetime ConsumptionJournal of Business & Economic Statistics, 1999
- Consumption, Income, and Interest Rates: Reinterpreting the Time Series EvidenceNBER Macroeconomics Annual, 1989