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Investment in financial literacy, social security, and portfolio choice*

Published online by Cambridge University Press:  29 December 2014

TULLIO JAPPELLI  and
MARIO PADULA
TULLIO JAPPELLI
Affiliation:
University of Naples Federico II, CSEF and CEPR (e-mail: tullio.jappelli@unina.it)
MARIO PADULA
Affiliation:
Università della Svizzera Italiana (USI), Facoltà di scienze economiche, IdEP, CSEF and CEPR (e-mail: padulm@usi.ch)
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Abstract

We present an intertemporal portfolio choice model where individuals invest in financial literacy, save, allocate their wealth between a safe and a risky asset, and receive a pension when they retire. Financial literacy affects the excess return from and cost of stock-market participation. Investors simultaneously choose how much to save, their portfolio allocation, and the optimal investment in financial literacy. The model implies that one should observe a positive correlation between stock-market participation (and risky asset share, conditional on participation) and financial literacy, and a negative correlation between the generosity of the social security system and financial literacy. The model also implies that financial literacy accumulated early in life is positively correlated with the individual's wealth and portfolio allocations in later life. Using microeconomic cross-country data, we find support for these predictions.

Keywords

E2D8G1J24Financial literacyportfolio choicesaving
Type
Articles
Information
Journal of Pension Economics & Finance , Volume 14 , Special Issue 4: Household Finance , October 2015 , pp. 369 - 411
Copyright
Copyright © Cambridge University Press 2014 

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Footnotes

*

We thank the Observatoire de l'Epargne Européenne (OEE) for financial support, Didier Davydoff and Christian Gollier for helpful suggestions. We also thank participants in the OEE Conference ‘Are Europeans lacking in financial literacy?’, Paris, 8 February 2013, for comments. Any errors are our own.

References

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