This paper undertakes an assessment of a rapidly growing body of economic research on financial literacy. We start with an overview of theoretical research which casts financial knowledge as a form of investment in human capital. Endogenizing financial knowledge has important implications for welfare as well as policies intended to enhance levels of financial knowledge in the larger population. Next, we draw on recent surveys to establish how much (or how little) people know and identify the least financially savvy population subgroups. This is followed by an examination of the impact of financial literacy on economic decision-making in the United States and elsewhere. While the literature is still young, conclusions may be drawn about the effects and consequences of financial illiteracy and what works to remedy these gaps. A final section offers thoughts on what remains to be learned if researchers are to better inform theoretical and empirical models as well as public policy.

/pdf/the-economic-importance-of-financial-literacy-theory-and-17mb1g4cfb.pdf

The Economic Importance of Financial Literacy: Theory and Evidence

This paper undertakes an assessment of a rapidly growing body of economic research on financial literacy. We start with an overview of theoretical research, which casts financial knowledge as a form of investment in human capital. Endogenizing financial knowledge has important implications for welfare, as well as policies intended to enhance levels of financial knowledge in the larger population. Next, we draw on recent surveys to establish how much (or how little) people know and identify the least financially savvy population subgroups. This is followed by an examination of the impact of financial literacy on economic decision making in the United States and elsewhere. While the literature is still young, conclusions may be drawn about the effects and consequences of financial illiteracy and what works to remedy these gaps. A final section offers thoughts on what remains to be learned if researchers are to better inform theoretical and empirical models as well as public policy. (JEL A20, D14, G11, I20, J26)

/pdf/the-economic-importance-of-financial-literacy-theory-and-2yhcozat6n.pdf

The economic importance of financial literacy: theory and evidence

Economics Of Discrimination

Difference-in-Differences with multiple time periods

In this article, we consider identification, estimation, and inference procedures for treatment effect parameters using Difference-in-Differences (DiD) with (i) multiple time periods, (ii) variation in treatment timing, and (iii) when the "parallel trends assumption" holds potentially only after conditioning on observed covariates. We show that a family of causal effect parameters are identified in staggered DiD setups, even if differences in observed characteristics create non-parallel outcome dynamics between groups. Our identification results allow one to use outcome regression, inverse probability weighting, or doubly-robust estimands. We also propose different aggregation schemes that can be used to highlight treatment effect heterogeneity across different dimensions as well as to summarize the overall effect of participating in the treatment. We establish the asymptotic properties of the proposed estimators and prove the validity of a computationally convenient bootstrap procedure to conduct asymptotically valid simultaneous (instead of pointwise) inference. Finally, we illustrate the relevance of our proposed tools by analyzing the effect of the minimum wage on teen employment from 2001--2007. Open-source software is available for implementing the proposed methods.

Difference-in-Differences with Multiple Time Periods

Using a high‐stakes field experiment conducted with a financial brokerage, we implement a novel design to separately identify two channels of social influence in financial decisions, both widely studied theoretically. When someone purchases an asset, his peers may also want to purchase it, both because they learn from his choice (“social learning”) and because his possession of the asset directly affects others' utility of owning the same asset (“social utility”). We randomize whether one member of a peer pair who chose to purchase an asset has that choice implemented, thus randomizing his ability to possess the asset. Then, we randomize whether the second member of the pair: (i) receives no information about the first member, or (ii) is informed of the first member's desire to purchase the asset and the result of the randomization that determined possession. This allows us to estimate the effects of learning plus possession, and learning alone, relative to a (no information) control group. We find that both social learning and social utility channels have statistically and economically significant effects on investment decisions. Evidence from a follow‐up survey reveals that social learning effects are greatest when the first (second) investor is financially sophisticated (financially unsophisticated); investors report updating their beliefs about asset quality after learning about their peer's revealed preference; and, they report motivations consistent with “keeping up with the Joneses” when learning about their peer's possession of the asset. These results can help shed light on the mechanisms underlying herding behavior in financial markets and peer effects in consumption and investment decisions.

/pdf/understanding-mechanisms-underlying-peer-effects-evidence-2r4psjhcyx.pdf

Understanding Mechanisms Underlying Peer Effects: Evidence From a Field Experiment on Financial Decisions

We derive an inference method that works in differences-in-differences settings with few treated and many control groups in the presence of heteroskedasticity. As a leading example, we provide theo...

/pdf/inference-in-differences-in-differences-with-few-treated-3q4v67koug.pdf

Inference in Differences-in-Differences with Few Treated Groups and Heteroskedasticity

We evaluate whether a lack of guidance on how to choose the matching variables used in the Synthetic Control (SC) estimator creates specification-searching opportunities. We first provide theoretical results showing that specification-searching opportunities would be asymptotically irrelevant when the number of pre-treatment periods goes to infinity when we restrict to a subset of SC specifications. However, based on Monte Carlo simulations and simulations with real datasets, we show significant room for specification searching when the number of pre-treatment periods is finite and when alternative specifications commonly used in SC applications are also considered. This undermines one of the potential advantages of the method, which is providing a transparent way of choosing comparison units and, therefore, being less susceptible to specification searching than alternative methods. To address this problem, we provide recommendations to limit the possibilities for specification searching in the SC method. Finally, we analyze the possibilities for specification searching and our recommendations in two empirical applications.

/pdf/cherry-picking-with-synthetic-controls-43wivoiydp.pdf

Cherry Picking with Synthetic Controls

We analyze the properties of the Synthetic Control (SC) and related estimators when the pre-treatment fit is imperfect. In this framework, we show that these estimators are generally biased if treatment assignment is correlated with unobserved confounders, even when the number of pre-treatment periods goes to infinity. Still, we show that a demeaned version of the SC method can substantially improve in terms of bias and variance relative to the difference-in-difference estimator. We also derive a specification test for the demeaned SC estimator in this setting with imperfect pre-treatment fit. Given our theoretical results, we provide practical guidance for applied researchers on how to justify the use of such estimators in empirical applications.

Synthetic Controls with Imperfect Pre-Treatment Fit

This paper provides novel evidence on status goods, using a series of field experiments with an Indonesian bank that markets platinum credit cards to high-income customers. In a first experiment, the paper shows that demand for the platinum card greatly exceeds demand for a nondescript control product with identical benefits, suggesting demand for the pure status aspect of the card. Transaction data reveal that platinum cards are more likely to be used in social contexts, implying social image motivations. Combining price variation with information on the use of the card sheds light on the magnitude of the demand for social status. A second experiment provides evidence of positional externalities from the consumption of these status goods. The final experiment shows that increasing self-esteem causally reduces demand for status goods. This suggests that part of the demand for status is psychological in nature, and that social image is a substitute for self-image.

/pdf/status-goods-experimental-evidence-from-platinum-credit-3xfkigtytc.pdf

Bruno Ferman

Papers

Understanding Mechanisms Underlying Peer Effects: Evidence From a Field Experiment on Financial Decisions

Inference in Differences-in-Differences with Few Treated Groups and Heteroskedasticity

Cherry Picking with Synthetic Controls

Synthetic Controls with Imperfect Pre-Treatment Fit

Status Goods: Experimental Evidence from Platinum Credit Cards