nep-fle New Economics Papers
on Financial Literacy and Education
Issue of 2017‒07‒23
two papers chosen by

  1. The Market for Conflicted Advice By Martin Szydlowski; Briana Chang
  2. Voting in the Aftermath of a Pension Reform: The Role of Financial Literacy. By Fornero, Elsa; Lo Prete, Anna

  1. By: Martin Szydlowski (University of Minnesota); Briana Chang (University of Wisconsin-Madison)
    Abstract: We study decentralized markets in which advisers have conflicts of interest and compete for customers via information provision. We show that competition partially disciplines conflicted advisers. The equilibrium features information dispersion and sorting of heterogeneous customers and advisers: advisers with expertise in more information sensitive assets attract less informed customers, provide worse information, and earn higher profits. We apply our framework to the market for financial advice and establish new insights: while the conflicted fee structure affects asset return, it is irrelevant for the welfare of consumers. It is the underlying distribution of financial literacy that determines the consumers’ welfare.
    Date: 2017
  2. By: Fornero, Elsa; Lo Prete, Anna (University of Turin)
    Abstract: Economic reforms affecting people’s lives are generally quite unpopular and may imply an electoral cost. This can derive, among other things, from lack of understanding of the basic elements of reforms. Our paper shows that the electoral cost of a pension reform is significantly lower in countries where the level of financial literacy is higher. The evidence from data on legislative elections held between 1990 and 2010 in 21 advanced countries is robust when we control for macro-economic conditions, demographic factors, and characteristics of the political system. Interestingly, these findings are not robust when we use less specific indicators of human capital – such as general schooling - supporting the view that knowledge of basic economic and financial concepts has distinctive features that may help reduce the electoral cost of reforms having a relevant impact on the life cycle of individuals.
    Date: 2017–06

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