Financial Literacy and Neighborhood Effects

Abstract

This study uses data from the 2009 and 2012 waves of the National Financial Capability Study to examine the effects of neighborhood characteristics on financial literacy. Controlling for individual characteristics, multivariate regression analysis shows that a zip code's education level has a significant impact on financial literacy. This finding is consistent with social learning as a mechanism of financial knowledge acquisition, with neighborhood education serving as a proxy for the level of financial knowledge of one's social network. Although social effects are not the only possible explanation for this finding, the result is robust even after controlling for a host of other factors such as getting advice from financial professionals, receiving financial education, and living in a zip code with greater employment in the financial industry. This study additionally documents that zip code education effects are present with various savings and credit measures.

Financial Literacy: The Role of the Local Context

“…Finally, with regard to human relations the composite index includes also a measure of general trust. In what follows, we call this indicator “social capital.” Following Lachance () and Haliassos, Jansson, and Karabulut (), we expect that respondents living in a region where social relations are more developed to show a higher level of financial knowledge and attitude.…”

“…This result is corroborated by Nicolini, Cude, and Chatterjee (), who compare the degree of financial literacy in Canada, Italy, the United Kingdom, and the United States; in general, men who are older than 24 years and have at least a high school education are more financially literate than are the reference groups. Other research findings have shown that differences in financial literacy can be influenced by social relations; more knowledgeable social networks—as represented by neighborhood education—have a significant and independent impact on individual financial literacy (Lachance ). Financially literate neighbors have a positive influence on the economic choices of immigrant households in Sweden (Haliassos, Jansson, and Karabulut ), namely, on saving for retirement in the medium term and shareholding in the longer term, especially when neighbors had education in economics or business.…”

Financial literacy, financial advice, and financial behavior

“…socialization, Lachance (2014) finds that even the educational attainment of respondents' neighbors on average impacts their financial literacy levels.…”

Racial Differences in the Returns to Financial Literacy Education

“…We expect that the coefficient on offered is a measure of positive externalities from education, or a measure of the importance the local area attributes to financial literacy. Lachance () suggest that social factors or “observational learning” have spillover effects. Not all states or jurisdictions provide financial literacy education, thus in areas where it is offered, we can infer the local education system has identified financial literacy as important education to offer.…”