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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 underestate the impact of financial literacy on saving. JEL Classification: E2, D8, G1, J24 Keywords: Financial Literacy, Cognitive Abilities, Human Capital, Saving
The budget constraint requires that, eventually, consumption must adjust fully to any permanent shock to income. Intuition suggests that, knowing this, optimizing agents will fully adjust their spending immediately upon experiencing a permanent shock. However, this paper shows that if consumers are impatient and are subject to transitory as well as permanent shocks, the optimal marginal propensity to consume out of permanent shocks (the MPCP) is strictly less than 1, because buffer stock savers have a target wealth-to-permanent-income ratio; a positive shock to permanent income moves the ratio below its target, temporarily boosting saving. Keywords: Risk, Uncertainty, Consumption, Precautionary Saving, Buffer Stock Saving, Permanent Income Hypothesis.
Household saving behavior : the role of literacy, information and financial education programs
(2007)
Individuals are increasingly in charge of their own financial security after retirement. But how well-equipped are individuals to make saving decisions; do they possess adequate financial literacy, are they informed about the most important components of saving plans, do they even plan for retirement? This paper shows that financial illiteracy is widespread among the US population and particularly acute among specific demographic groups, such as those with low education, women, African-Americans and Hispanics. Moreover, close to half of older workers do not know which type of pensions they have and the large majority of workers know little about the rules governing Social Security benefits. Lack of literacy and lack of information can affect the ability to save and to secure a comfortable retirement; few individuals rely on the help of financial advisors and ignorance about basic financial concepts can be linked to lack of retirement planning and lack of wealth. Financial education programs can help improve saving and financial decision-making, but much more can be done to improve the effectiveness of these programs. JEL Classification: D91
We review savings trends in Italy, summarizing available empirical evidence on Italians’ motives to save, relying on macroeconomic indicators as well as on data drawn from the Bank of Italy’s Survey of Household Income and Wealth from 1984 to 2004. The macroeconomic data indicate that households’ saving has dropped significantly, although Italy continues to rank above most other countries in terms of saving. We then examine with microeconomic data four indicators of household financial conditions: the propensity to save, the proportion of households with negative savings, the proportion of households with debt, and the proportion of households that lack access to formal credit markets. By international comparison, the level of debt of Italian households and default risk are relatively low. But in light of the deep changes undergone by the Italian pension system, the fall in saving is a concern, particularly for individuals who entered the labor market after the 1995 reform and who have experienced the largest decline in pension wealth. JEL Classification: D91
Recent models with liquidity constraints and impatience emphasize that consumers use savings to buffer income fluctuations. When wealth is below an optimal target, consumers try to increase their buffer stock of wealth by saving more. When it is above target, they increase consumption. This important implication of the buffer stock model of saving has not been subject to direct empirical testing. We derive from the model an appropriate theoretical restriction and test it using data on working-age individuals drawn from the 2002 and 2004 Italian Surveys of Household Income and Wealth. One of the most appealing features of the survey is that it has data on the amount of wealth held for precautionary purposes, which we interpret as target wealth in a buffer stock model. The test results do not support buffer stock behavior, even among population groups that are more likely, a priori, to display such behavior. The saving behavior of young households is instead consistent with models in which impatience, relative to prudence, is not as high as in buffer stock models. JEL Classification: D91
We find that on average consumers chose the contract that ex post minimized their net costs. A substantial fraction of consumers (about 40%) still chose the ex post sub-optimal contract, with some incurring hundreds of dollars of avoidable interest costs. Nonetheless, the probability of choosing the sub-optimal contract declines with the dollar magnitude of the potential error, and consumers with larger errors were more likely to subsequently switch to the optimal contract. Thus most of the errors appear not to have been very costly, with the exception that a small minority of consumers persists in holding substantially sub-optimal contracts without switching. Klassifikation: G11, G21, E21, E51
We evaluate the importance of the precautionary saving motive by relying on a direct question about precautionary wealth from the 1995 and 1998 waves of the Survey of Consumer Finances. In this survey, a new question has been designed to elicit the amount of desired precautionary wealth. This allows us to assess the amount of precautionary accumulation and to overcome many of the problems of previous works on this topic. We find that a precautionary saving motive exists and affects virtually every type of household. However, precautionary savings account for only 8 percent of total wealth holdings. Even though this motive does not give rise to large amounts of wealth, particularly for young and middle-age households, it is particularly important for two groups: older households and business owners. Overall, we provide strong evidence that we need to take the precautionary saving motive into account when modeling saving behavior. Klassifizierung: D91, E21, C21