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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, we develop a calibrated stochastic life cycle model which features endogeneous financial literacy accumulation. Our 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. We 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.
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All findings, interpretations, opinions and conclusions of this paper represent the views of the authors and not those of the Wharton School or the Pension Research Council, SSA, any agency of the Federal Government, or any other institution with which the authors are affiliated. © 2011 Pension Research Council of the Wharton School of the University of Pennsylvania. All rights reserved.
The research reported herein was performed pursuant to a grant from the U.S. Social Security Administration (SSA) funded as part of the Financial Literacy Research Consortium. The authors also acknowledge support provided by the Pension Research Council and Boettner Center at the Wharton School of the University of Pennsylvania, and the RAND Corporation. Michaud acknowledges additional support from the Fond Québécois de Recherche sur la Société et la Culture (FQRSC - # 145848). We also thank Hugh Hoikwang Kim and Yong Yu for excellent research assistance and we acknowledge the use of the RAND grid computing server to perform our calculations. We thank Audrey Brown for editorial assistance. The opinions and conclusions expressed herein are solely those of the authors and do not represent the opinions or policy of ©2011 Lusardi, Michaud, and Mitchell. All rights reserved.
Date Posted: 28 June 2019