Optimal financial knowledge and wealth inequality

TitleOptimal financial knowledge and wealth inequality
Publication TypeJournal Article
Year of Publication2017
AuthorsLusardi, A, Michaud, P-C, Mitchell, OS
JournalThe Journal of Political Economy
ISSN Number0022-3808
KeywordsFinancial literacy, Retirement Planning and Satisfaction, Wealth

We show that financial knowledge is a key determinant of wealth inequality in a stochastic lifecycle model with endogenous financial knowledge accumulation, where financial knowledge enables individuals to better allocate lifetime resources in a world of uncertainty and imperfect insurance. Moreover, because of how the U.S. social insurance system works, better-educated individuals have most to gain from investing in financial knowledge. Our parsimonious specification generates substantial wealth inequality relative to a one-asset saving model and one where returns on wealth depend on portfolio composition alone. We estimate that 30-40 percent of retirement wealth inequality is accounted for by financial knowledge.

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Alternate JournalJ Polit Econ
Citation Key9165
PubMed ID28555088
PubMed Central IDPMC5445941
Grant ListR01 HD069609 / HD / NICHD NIH HHS / United States
U01 AG009740 / AG / NIA NIH HHS / United States