The Causal Mechanism of Financial Education: Evidence From Mediation Analysis

Fenella Carpena,Bilal Zia

doi:10.2139/ssrn.3244634

Abstract

This paper uses a field experiment in India and mediation analysis to investigate the causal mechanisms between financial education and financial behavior. Focusing on the mediating role of financial literacy, we propose a broader definition of financial knowledge that includes three dimensions: numeracy skills, financial awareness, and attitudes towards personal finance. We then employ causal mediation analysis to investigate the proportion of the treatment effect that can be attributed to these three channels. Strikingly, we find that numeracy does not mediate any effects of financial education on financial outcomes. For simple financial actions such as budgeting, both awareness and attitudes serve as pathways, while for more complex financial activities such as opening a savings account, attitudes play a more prominent role---though these patterns appear to be sensitive to confounding. We also compare our mediation analysis results to other empirical techniques that have been typically used to study mechanisms, and we discuss how mediation analysis differs from these approaches.

Highlights

Over the last decade, financial education programs have become an increasingly popular tool for promoting financial inclusion, consumer welfare, and stable financial systems (e.g., Lusardi and Mitchell, 2013; World Bank, 2017)
In Carpena et al (2017), we focus on the Average Treatment Effect (ATE) and find that financial education alone did not bring about large changes in financial behavior
The data in this paper come from a baseline survey before the start of the interventions and an endline survey almost ten months after the final session of the video-based education program

Summary

Introduction

Financial education programs have become an increasingly popular tool for promoting financial inclusion, consumer welfare, and stable financial systems (e.g., Lusardi and Mitchell, 2013; World Bank, 2017). Critics maintain that financial education is a fallacy because it is neither economical nor effective, arguing instead for other forms of financial regulation such as retirement savings defaults and pro bono financial advisory services (e.g., Willis, 2011). This study is part of a broader research project in India that was undertaken in collaboration with Shawn Cole and Jeremy Shapiro, to whom we are grateful. We are grateful to Simon Galle, Xavier Giné, Arie Kapteyn, Annamaria Lusardi, and David McKenzie, as well as participants at the Oslo Business School Research Group in Economics and Finance Seminar and the 2nd CEAR-RSI Household Finance Workshop for many helpful comments and suggestions. The study is registered in the AEA RCT Registry, ID # AEARCTR-0000173

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Discussion

Conclusion