Endogenous Financial Literacy, Saving, and Stock Market Participation

Recent empirical literature provides evidence that financial literacy, human capital, education, saving, and stock market participation are interconnected decisions. However, a consolidated theoretical explanation of such connections is missing. We contribute to this topic by building a framework that includes all these decisions in an encompassing model. We build a two-period model in which individuals acquire education, work, and save for retirement; financial literacy reduces the costs of managing risky assets available on the stock market. Our results, besides providing a theoretical foundation for the role and the determinants of the above-mentioned decisions, can also explain several stylized facts on literacy, human capital, and stock market participation.