Equity of Opportunities, Educational Achievement, and Financial Literacy

Project Start:01/2017
Researchers:Horst Entorf, Jia Hou
Area: Household Finance
Funded by:LOEWE

This project was part of the team project "Household Heterogeneity, Financial Frictions and Inequality ".

Topic and Objectives

The project considers the link between parental backgrounds, neighborhoods, schooling systems and financial education (resources, teacher shortage etc.) and economic outcomes. Following evidence on the importance of investing in disadvantaged children, and influenced by research showing that differences in school quality perpetuate income inequality (Chetty et al. 2014), the focus lies on the analysis of gaps in outcomes of financial education, as, e.g., between children from high and low educated parents, natives and migrant youths, but also between boys and girls. The first objective is to analyze reasons for inequality in financial education and to identify policies, which are likely to have significant effects on financial planning capabilities, and help facilitate a more inclusive future society. A second goal of the proposal is the evaluation of financial frictions as a source of educational inequality.

In this project, we investigate the main financial education projects worldwide and their effects identified by different empirical literature. The review focuses on the effects of those projects on disadvantaged groups and is the first one to review the current theoretical framework that rationalizes financial education (working paper 1). In addition, in this project, we are the first to make use of nationwide survey data (Panel on Household Finances, PHF) conducted by the Deutsche Bundesbank to investigate the importance of institutional settings for financial literacy, which has a significant impact on various economic outcomes (working paper 2).


Key Findings

  • The theories on financial literacy include a human capital accumulation approach and a life cycle approach. Both models suggest that the effects of financial education interventions should be heterogeneous across the population (working paper 1).
  • Empirical studies suggest a positive effect of financial education interventions on short-term financial knowledge and awareness of the young, but there is no proven evidence on long-term behavior. Studies on financial behavior of migrants and immigrants show almost no effect of financial education initiatives (working paper 1).
  • Variables capturing the socio-demographic and economic background of the respondents have the expected impact on financial literacy, but there is a consistent and significant gap between East and West Germany (working paper 2).
  • Among the determinants of financial literacy, education appears to be the factor that has the biggest positive effect, both in West and East Germany, and the one that may help the most in closing the gap between the two regions (working paper 2).
  • There is suggestive evidence that the longer an Eastern household had been exposed to socialist education, the lower the financial literacy (working paper 2). 


Related Working Papers

205Horst Entorf, Jia HouFinancial Education for the Disadvantaged? A Review2018 Household Finance Education, Financial Literacy, Inequality, Program Evaluation
217Maddalena Davoli, Jia HouFinancial Literacy and Socialist Education: Lessons from the German Reunification2018 Household Finance financial literacy determinants, socialist education, German reunification, DiD