Abstract
This paper investigates the impact of household heads' financial literacy on households' financial fragility. We estimate a panel probit model by employing panel data from four waves (2015, 2017, 2019, and 2021) of the China Household Finance Survey (CHFS) with 58,802 observations. We focus on the mediating role of insurance awareness. First, enhanced financial literacy significantly mitigates households’ financial fragility, with insurance participation emerging as a crucial mechanism. Second, our cross-sectional analyses show that the beneficial effects of financial literacy are more pronounced in households not constrained by wealth or cognitive skills, as well as households with lower health risks and those located in the central and western regions of China. Third, we identify that financial literacy, through its distinctive financial knowledge attributes, offers unique contributions to reducing household financial fragility, separate from general cognitive abilities. Last, we highlight peer effects in the influence of financial literacy on financial fragility, predominantly driven by social norms.
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