Abstract
This paper examines the relationship between household consumption and financial literacy. The economic framework is a simple life-cycle model of consumption in which financial literacy affects the rate of return on assets. The theoretical predictions are that, for plausible values of the intertemporal elasticity of substitution, financial literacy is positively related to both the level of consumption and consumption growth. We empirically test these theoretical predictions with Dutch data from the LISS household panel. Our results provide evidence in favour of a positive association between non-durable consumption, and in particular food consumption, and financial literacy. No evidence is, however, found in favour of an association between consumption growth and financial literacy.
Highlights
Insights into household saving and consumption decisions are important for understanding households’ financial preparation for retirement and the role in this of investment decisions
We have tested for gender differences for each question using the seemingly unrelated regression model (SUR) with clustered standard errors at the individual level and find that gender differences are statistically significant
We have included time dummies captured by t and a set of individual and household characteristics summarised by the vector Zit for singles and by the vector Zit,j for couples where j denotes partner 1 or partner 2
Summary
Insights into household saving and consumption decisions are important for understanding households’ financial preparation for retirement and the role in this of investment decisions. Information is available on the age of all household members, their position in the household (e.g. a child, household head or (un)wedded partner), type of dwelling, the level of education of the respondent, household size, net monthly household income, occupation and marital status Those variables are part of the Background variables module of the LISS panel and are available for every month between 2009 and 2017. We have added the children’s responses to the non-assignable consumption questions to the answers of the parent(s) and subsequently dropped the children’s observations This way, we have kept the responses of household heads and, if applicable, of their partners without losing information on the children’s consumption. We are left with 89% of our gross sample
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