The Effects of Financial and Economic Literacy on Individual Policy Preferences

Magistro, Beatrice. 2021. "The Effects of Financial and Economic Literacy on Individual Policy Preferences"

In a time of growing support for welfare-reducing, protectionist policies, such as those opposing immigration, free trade, and EU integration, my dissertation is among the first studies to explore the role that financial and economic literacy, and its interaction with information, plays in shaping voters' policy preferences. The hypothesis tested in my first essay is that financial literacy affects economic policy preferences. I analyze data from the British Election Study and test my theory on support for free trade in the United Kingdom. Findings suggest that financial literacy does affect economic policy preferences. On average, financially literate individuals are more likely to think that free trade is good for the British economy. Furthermore, this is true regardless of economic self‐interest, as both financially literate winners and losers from globalization are more likely to support free trade than their illiterate counterparts.

In my second essay I analyze original survey data collected in Italy and show that financially and economically literate individuals, regardless of their economic self-interest, are more likely to prefer remaining in the Eurozone, to favor free trade, EU immigration, non-EU immigration, and the Fornero pension reform. I provide preliminary evidence that the lack of differential effects between financially and economically literate winners and losers from globalization and pension reform is driven by longer time horizons. Finally, I examine different ways to measure financial and economic literacy and find that there is no evidence of a similar effect when looking at general education, suggesting that financial and economic literacy has distinctive features that more closely capture an individual's ability to evaluate policies.

In the third essay I add an important mediator in the relationship between financial and economic literacy and policy preferences: discount rates. The findings from my second essay on Italy suggest that financially and economically literate individuals have significantly lower discount rates, which may explain differential preferences across literacy levels in policy scenarios with intertemporal trade-offs. To further investigate this relationship, in my third essay, I conducted a classroom experiment at the University of Washington, where I found that learning concepts such as interest compounding, the time value of money, and risk in the capitalization process lowers discount rates, and there is not a selection effect into economics and finance.

Finally, in my fourth essay, I investigate what type of information economically literate and illiterate individuals rely on to form their preferences. I use a survey experiment on price controls in Italy and show that voters are less likely to rely on party cues and more likely to rely on policy information when they are financially and economically literate, while the opposite is true of financially and economically illiterate individuals.

My dissertation has implications for electoral democracies in general, and for the current wave of populism. Most protectionist and populist policies harm social welfare; if most people lack the framework for comprehending the effects that a specific policy has on society, then they are also more likely to be susceptible to appeals by populists to adopt distortionary policies in the name of seemingly beneficial outcomes such as national sovereignty and greater equality. Conversely, if they can recognize the potential for mutual gains, this may get them close enough to welfare enhancing behavior.

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