Ann-Kathrine Ejsing () and Andreas Østergaard Nielsen ()
Ann-Kathrine Ejsing: Forsikring & Pension, Postal: Philip Heymans Alle 1, 2900 Hellerup, Denmark
Andreas Østergaard Nielsen: Forsikring & Pension, Postal: Philip Heymans Alle 1, 2900 Hellerup, Denmark
Abstract: In this paper we create an indicator of financial literacy based on the score in a test on basic financial knowledge. We seek to determine preferences and individual characteristics associated with high financial literacy. Previous papers conclude that financial literacy is fairly weak. Weak financial literacy is a problem be - cause illiterate people are not capable of making informed decisions regarding their economy and personal finance, Rooij et. al. (2012), Lusardi and Mitchell (2011a). This paper contributes with two analyses showing the causal effect of financial literacy on the probability of being in a bad debtor register and the average interest on debt, respectively. Education is closely related to financial literacy. People with higher education also have higher financial literacy. In addition, people who had financial lite - racy as a part of their curriculum have higher financial literacy over and above the effect of general education. Finally, people with familiarity and interest in personal finance and more risk adverse people have higher financial literacy. Using IV estimation we investigate the causal relationship between financial literacy and the propensity to be a bad payer and find a significant relationship indicating that lower finan - cial literacy increases the propensity to be a bad debtor. Further we identify a causal relationship between lower financial literacy and a higher average interest on debt. Hence, the paper contributes to the understanding of the consequences of low finan - cial literacy on personal finance decisions.
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