Does financial literacy improve financial behavior in emerging economies? Evidence from India
ISSN: 0307-4358
Article publication date: 31 March 2022
Issue publication date: 9 September 2022
Abstract
Purpose
The study aims to empirically analyze whether financial literacy can improve the financial behavior of individuals in the context of emerging markets like India.
Design/methodology/approach
The authors use the nationally representative Financial Inclusion Insights survey conducted in India during 2018 for the analysis. The authors consider the financial literacy score based on the standard financial literacy quiz that includes understanding basic numeracy, interest rates, inflation and diversification concepts to study its effect on payment attitude, savings attitude and risk management behavior proxied by insurance uptake. Using an instrumental variable approach, the authors account for the possible endogeneity associated with the financial literacy variable.
Findings
The authors find that less than 9% of individuals have correctly answered questions capturing all four aspects of financial literacy. The analysis suggests that improvements in financial literacy scores indeed increases the likelihood of exhibiting superior financial behavior. The results are robust to alternative definitions of financial literacy, outcome variables and inclusion of additional controls. The authors find that financial literacy increases financial planning, and this, in turn, possibly improves financial behavior. The effects are prominent for those residing in the urban area and having confidence in their financial skills.
Originality/value
This is among the few studies that provide insights regarding how improvements in financial literacy can improve financial behavior in an emerging economy context. Moreover, this study highlights financial planning as a possible channel through which financial literacy affects financial behavior. Further, the heterogeneous effects based on the area of residence and own ability underscore the need for complementary policies.
Keywords
Acknowledgements
The authors would like to thank editor Naomi Boyd for her support during the review process. The authors are grateful to the anonymous reviewers for their insightful comments. The authors would also like to thank the participants of India Finance Conference 2021, 7th Interenational Conference on Empirical Issues in Trade and Finance 2021, DOCMAD 2021 and Jindal School of Government and Public Policy's Annual Conference on Economics and Public Policy 2021 for providing feedback on the earlier versions of the paper.
Citation
Lahiri, S. and Biswas, S. (2022), "Does financial literacy improve financial behavior in emerging economies? Evidence from India", Managerial Finance, Vol. 48 No. 9/10, pp. 1430-1452. https://doi.org/10.1108/MF-09-2021-0440
Publisher
:Emerald Publishing Limited
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