Optimal Financial Knowledge and Wealth Inequality
economic barriers, financial education
Using a stochastic life cycle model with endogenous ﬁnancial knowledge accumulation, we show that ﬁnancial knowledge is a key determinant of wealth inequality. The mechanism we posit is that ﬁnancial knowledge enables individuals to better allocate resources over their lifetimes in a world of uncertainty and imperfect insurance. Moreover, because of how the U.S. social insurance system works, better-educated individuals have the most to gain from investing in ﬁnancial knowledge. As a result, making ﬁnancial knowledge accumulation endogeneous ampliﬁes diﬀerences in accumulated retirement wealth over the life cycle. According to our estimates, from 30 to 40 percent of wealth inequality can be accounted for by ﬁnancial knowledge.