Research

Credit Shocks and Financial Literacy Accumulation (Job Market Paper) Download the Paper

Do adverse borrowing conditions induce financial literacy accumulation? I develop a life cycle model with financial literacy investment and borrowing rate uncertainty and calibrate it to the American Life Panel. When households expect borrowing rates to vary often, they invest in financial literacy to insure against borrowing rate variation. I evaluate the effect of two popular policies developed to ameliorate the effects of low financial literacy$-$an interest rate cap and a financial literacy subsidy. I find that an interest rate cap discourages financial literacy accumulation, while a subsidy of leads households to obtain a higher return by three basis points. In particular, the subsidy improves the welfare the most for low-income, highly leveraged households.

A Quantitative Model of Financial Literacy Accumulation Download the Paper

I build and calibrate a quantitative model of financial literacy accumulation and analyze the effect of income expectations on the rate of accumulation. I find that the shape of the age-earnings profile influences the degree to which financial literacy serves as a substitute and/or complement to household savings. Using the calibrated model, I quantitatively analyze two experiments: a negative wealth-shock and a school financial literacy program. While individuals with flat income profiles acquire less financial literacy on average, they respond more sensitively to wealth shocks and the financial literacy program than individuals with steep income profiles. In both cases, they invest more in financial literacy and let more of their financial literacy depreciate. These results are useful to policymakers interested in targeting groups that may benefit the most from financial literacy programs and suggest some cohorts may be resource-constrained with respect to financial literacy accumulation.

Work-in-Progress

A Key to the Puzzle: Financial Literacy and the Credit Card Debt Puzzle (Joint Work with Xavier Bautista)

We build a three-asset model of financial literacy, credit card debt and liquid savings and calibrate the model to the NLSY79. We document that a significant proportion of financially literate individuals are co-holding enough liquid savings to pay down their credit card debt and/or student loan debt. In our model, financial literacy serves as a tool to lower the cost of co-holding debt and savings and helps to explain this observed fact.

Draft coming soon!