Know More, Spend More? The Impact of Financial Literacy on Household Consumption

Milena Dinkova; Adriaan Kalwij; Rob Alessie

doi:10.1007/s10645-021-09391-4

Know More, Spend More? The Impact of Financial Literacy on Household Consumption

Milena Dinkova, Adriaan Kalwij, Rob Alessie^*

^*Corresponding author for this work

Research output: Contribution to journal › Article › Academic › peer-review

Abstract

This paper examines the relationship between household consumption and financial literacy. The economic framework is a simple life-cycle model of consumption in which financial literacy affects the rate of return on assets. The theoretical predictions are that, for plausible values of the intertemporal elasticity of substitution, financial literacy is positively related to both the level of consumption and consumption growth. We empirically test these theoretical predictions with Dutch data from the LISS household panel. Our results provide evidence in favour of a positive association between non-durable consumption, and in particular food consumption, and financial literacy. No evidence is, however, found in favour of an association between consumption growth and financial literacy.

Original language	English
Pages (from-to)	469-498
Number of pages	30
Journal	Economist (Netherlands)
Volume	169
Issue number	4
DOIs	https://doi.org/10.1007/s10645-021-09391-4
Publication status	Published - Nov 2021

Bibliographical note

Funding Information:
We gratefully acknowledge financial support by Netspar for the Large/Medium vision project: Preparing for Retirement: Tailoring, Literacy and effective Pension Communication (LMVP2014.02). The authors thank Leo Lentz, Federica Teppa, Serena Trucchi, Tabea Bucher-Koenen, Chiara Pronzato, and Lisa Brüggen for their valuable comments and suggestions. We also thank the participants of the Netspar Pension Day 2015 in Utrecht, the MOPACT International Workshop 2016 in Turin, Italy, the Ph.D. meeting in Turin in 2017 and the Netspar International Pension Workshop 2018 in Leiden for a lively discussion. Furthermore, Milena Dinkova would like to thank MEA (Munich) and Tabea Bucher-Koenen for hosting a research visit in November 2017 and for the valuable comments and suggestions she received during her stay.

Publisher Copyright:
© 2021, The Author(s).

Funding

We gratefully acknowledge financial support by Netspar for the Large/Medium vision project: Preparing for Retirement: Tailoring, Literacy and effective Pension Communication (LMVP2014.02). The authors thank Leo Lentz, Federica Teppa, Serena Trucchi, Tabea Bucher-Koenen, Chiara Pronzato, and Lisa Brüggen for their valuable comments and suggestions. We also thank the participants of the Netspar Pension Day 2015 in Utrecht, the MOPACT International Workshop 2016 in Turin, Italy, the Ph.D. meeting in Turin in 2017 and the Netspar International Pension Workshop 2018 in Leiden for a lively discussion. Furthermore, Milena Dinkova would like to thank MEA (Munich) and Tabea Bucher-Koenen for hosting a research visit in November 2017 and for the valuable comments and suggestions she received during her stay.

Keywords

Financial literacy
Household consumption
Life-cycle model
Self-assessed financial literacy

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10.1007/s10645-021-09391-4Licence: CC BY

Dinkova2021_Article_KnowMoreSpendMoreTheImpactOfFiFinal published version, 0.99 MBLicence: CC BY

Cite this

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title = "Know More, Spend More? The Impact of Financial Literacy on Household Consumption",

abstract = "This paper examines the relationship between household consumption and financial literacy. The economic framework is a simple life-cycle model of consumption in which financial literacy affects the rate of return on assets. The theoretical predictions are that, for plausible values of the intertemporal elasticity of substitution, financial literacy is positively related to both the level of consumption and consumption growth. We empirically test these theoretical predictions with Dutch data from the LISS household panel. Our results provide evidence in favour of a positive association between non-durable consumption, and in particular food consumption, and financial literacy. No evidence is, however, found in favour of an association between consumption growth and financial literacy.",

keywords = "Financial literacy, Household consumption, Life-cycle model, Self-assessed financial literacy",

author = "Milena Dinkova and Adriaan Kalwij and Rob Alessie",

note = "Funding Information: We gratefully acknowledge financial support by Netspar for the Large/Medium vision project: Preparing for Retirement: Tailoring, Literacy and effective Pension Communication (LMVP2014.02). The authors thank Leo Lentz, Federica Teppa, Serena Trucchi, Tabea Bucher-Koenen, Chiara Pronzato, and Lisa Br{\"u}ggen for their valuable comments and suggestions. We also thank the participants of the Netspar Pension Day 2015 in Utrecht, the MOPACT International Workshop 2016 in Turin, Italy, the Ph.D. meeting in Turin in 2017 and the Netspar International Pension Workshop 2018 in Leiden for a lively discussion. Furthermore, Milena Dinkova would like to thank MEA (Munich) and Tabea Bucher-Koenen for hosting a research visit in November 2017 and for the valuable comments and suggestions she received during her stay. Publisher Copyright: {\textcopyright} 2021, The Author(s).",

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doi = "10.1007/s10645-021-09391-4",

language = "English",

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PY - 2021/11

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N2 - This paper examines the relationship between household consumption and financial literacy. The economic framework is a simple life-cycle model of consumption in which financial literacy affects the rate of return on assets. The theoretical predictions are that, for plausible values of the intertemporal elasticity of substitution, financial literacy is positively related to both the level of consumption and consumption growth. We empirically test these theoretical predictions with Dutch data from the LISS household panel. Our results provide evidence in favour of a positive association between non-durable consumption, and in particular food consumption, and financial literacy. No evidence is, however, found in favour of an association between consumption growth and financial literacy.

AB - This paper examines the relationship between household consumption and financial literacy. The economic framework is a simple life-cycle model of consumption in which financial literacy affects the rate of return on assets. The theoretical predictions are that, for plausible values of the intertemporal elasticity of substitution, financial literacy is positively related to both the level of consumption and consumption growth. We empirically test these theoretical predictions with Dutch data from the LISS household panel. Our results provide evidence in favour of a positive association between non-durable consumption, and in particular food consumption, and financial literacy. No evidence is, however, found in favour of an association between consumption growth and financial literacy.

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Know More, Spend More? The Impact of Financial Literacy on Household Consumption

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Keywords

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