Academic journal article The Journal of Consumer Affairs

Financial Literacy and Neighborhood Effects

Academic journal article The Journal of Consumer Affairs

Financial Literacy and Neighborhood Effects

Article excerpt

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.

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With an increasingly complex landscape of financial products, developing financial literacy is more important than ever for consumers. The beneficial effects of financial literacy have been documented in a variety of contexts, such as retirement planning (Lusardi and Mitchell 2007), stock market participation (van Rooij, Lusardi, and Alessie 2011), and sensitivity to mutual fund fees (Hastings and Tejeda-Aston 2008). Unfortunately, most studies reveal low levels of financial knowledge in the population, with women, minorities, and those less educated being more vulnerable (e.g., Lusardi and Mitchell 2011). While the literature on the determinants of financial literacy has focused mainly on individual characteristics, social factors can also shape knowledge--a process that Bandura (1977) calls observational learning. In a financial literacy context, Bucher-Koenen and Lusardi (2011, 577) suggest that "those exposed to financially knowledgeable people become more financially knowledgeable themselves."

The objective of this article is to provide empirical evidence for this mechanism, specifically at the neighborhood (zip code) level. (1) This has been made possible by the 2009-2012 National Financial Capability Study (NFCS), which features over 53,000 observations and five financial literacy questions. The restricted-access version of the NFCS data is instrumental for our purposes since it includes the respondent's zip code, allowing us to match individuals with characteristics of their communities collected by the US Census Bureau. In this analysis, the individual's financial literacy score is obtained by counting the number of correct answers to the NFCS questions. As financial literacy is an emerging concept, we recognize that its definition and measurement are still a matter of discussion (e.g., see Remund 2010; Huston 2010; Knoll and Houts 2012) and consider alternative specifications in our robustness tests. While financial literacy scores are not generally available at the zip code level, we show that the zip code's average education level can proxy for the neighborhood's level of financial knowledge.

Regressing the financial literacy score simultaneously on individual and neighborhood education, the article's main result is that neighborhood education is highly significant at the 0.1% level. In other words, if we take two individuals with the same level of education and income, the one residing in the better-educated neighborhood is more likely to have a higher financial literacy score. While finding zip code education effects does not automatically imply that they are social in nature, our methodology carefully controls for a wide range of factors such as receiving advice from financial professionals and participating in financial education. The results also appear to be fairly robust: similar zip code education coefficients are obtained with the 2009 and 2012 waves and, combining the two, statistically significant results are observed for each demographic group and for each individual financial literacy question. …

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