Date of Degree

5-2019

Document Type

Dissertation

Degree Name

Ph.D.

Program

Economics

Advisor

Thom Thurston

Committee Members

Chun Wang

Yochanan Shachmurove

Subject Categories

Behavioral Economics | Finance

Keywords

Financial Literacy, Financial Planning, Risk Tolerance, Overconfidence, Financial Inclusion, Mediation Model

Abstract

This dissertation consists of three chapters on financial literacy. The chapters examine the impact of financial literacy on households’ risk tolerance and financial planning behavior. Financial literacy was assessed in two dimensions: an objectively-measured financial literacy score, and a subjectively-perceived financial literacy level.

The first chapter reviews the literature measuring financial literacy, and raises concerns about the prevalent state of financial-literacy overconfidence, which can lead to underprepared financial planning and irrational financial behavior. This chapter uses the survey data from the Financial Regulatory Authority’s (FINRAs) 2009, 2012 and 2015 National Financial Capability Study (NFCS) to explore how individual and regional characteristics can explain the extent of differences in financial literacy overconfidence.

The second chapter examines the role of risk tolerance in the association between financial literacy and financial planning behavior, using NFCS’s three waves survey. The results reveal that both financial literacy (objectively-measured and subjectively-perceived) and risk tolerance are positively associated with financial planning behavior, and that financial literacy can be employed as an effective tool to alleviate individuals’ perception bias in risk tolerance. This chapter uses structural equation models (SEM) with latent variables to extend mediation analysis for the categorical mediator (risk tolerance) and outcomes (financial planning behaviors). The results further underscore the essential mediator role of risk tolerance between financial literacy and financial planning behavior, implying that the current financial literacy program should put more focus on helping participants perceive the optimal degree of risk tolerance.

The third chapter uses data from the 2013 Chinese Household Finance Survey (CHFS) to explore the impact of financial literacy on Chinese households’ retirement planning and the demand for commercial[1]insurance. Particular attention is paid to financially excluded subpopulations (rural, illiterate and migrant). These subpopulations are vulnerable concerning the social pension system coverage. The chapter finds that improving financial literacy could help Chinese households better prepare for retirement. Households with a higher objective financial literacy score and who paid more attention to financial information are more likely to have a retirement plan, and have diversified ways to support life after retirement. Moreover, annual household disposable income, family net assets, gender, age, age-squared, family size, number of children, health condition are significant factors explaining how Chinese households choose different ways to support their lives after retirement. Rural and illiterate households depend more on saving and child support after retirement, while urban and literate households are more likely to rely on the social pension plan and retirement pay. Degrees of trust in commercial pension plans is the critical factor determining whether Chinese households are willing to buy commercial insurance and pension plans. This choice can be improved by means of increasing financial knowledge and paying more attention to financial information.

[1] Commercial insurance and commercial pension plan in this chapter refers to the health insurance, life insurance and pension plan that Chinese households purchased individually from a commercial company but not received directly from government. The counterpart in the U.S.is the same health insurance, life insurance and pension plan purchased from the marketplace, but not directly covered by an employer or the government.

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