Research

Abstract: A growing body of literature shows the importance of financial literacy in affecting house- holds’ choices. Fewer studies focus on understanding the determinants of different levels of financial literacy and our paper  contributes filling this gap by analyzing a specific determinant, the educational system, to explain the heterogeneity in financial literacy scores across Germany. We suggest that the lower financial literacy observed in East Germany is partially attributed to a different institutional framework experienced during the Cold War, more specifically, to the socialist educational system experienced in East Germany, which affected specific cohorts of individuals. By exploiting the unique set-up of German reunification, we identify education as a channel through which institutions and financial literacy are related in the German context. In support of this hypothesis, we find that individuals exposed to the Eastern educational system exhibit, on average, 12% to 21% lower financial literacy scores as compared to the control group. 

Abstract: Using a US nationally representative sample of over 6,000 adults from 26 countries of ancestry, we find a strong association between their financial literacy in the US and the financial literacy level in their self-reported country of ancestry. More specifically, if an individual from a country of ancestry with “average” financial literacy had instead come from a country with financial literacy one-standard deviation above the mean, his or her likelihood of answering correctly basic financial literacy questions regarding inflation, risk diversification, and interest rate in the US would have increased by 4 percentage points, a 9% increase relative to the average financial literacy in our sample of 43%. The cultural components behind this observed association include a strong emphasis on patience, long-term orientation and risk-aversion in the country of ancestry. We also find that the association is driven by financial literacy on risk diversification and interest compounding.