Abstract
Poor understanding of financial products and an inability to process financial information prevent millions of rural households in the developing world from making informed financial decisions. This article assesses the financial literacy and cognitive ability of farmers using data from a unique field experiment in the Indian state of Gujarat. Using ordered response models, the effect of farmers' education on cognitive ability and financial literacy is estimated on the one hand, and the relationship between cognitive ability and financial literacy is analysed on the other. Farmers' education and financial experience are shown to be significantly correlated with achievements in customized tests for ability in mathematics and probability, which are taken as the two components of cognitive ability. Cognitive ability, in turn, predicts financial aptitude and debt literacy, the two components of financial literacy. By focusing on farmers in a developing country, the findings contribute to an improved understanding of financial literacy in such settings and can inform the design of inclusive financial systems that are sensitive to the cognitive and informational limitations of rural households.
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