Navigating systemic shocks: Does financial literacy empower rural households to protect wealth?

Abstract

This paper aims to clarify the mechanism through which financial literacy converts into economic resilience during systemic crises, particularly in environments with varying levels of institutional support. Exploiting the pandemic as a quasi-natural experiment and utilizing panel data from the China Household Finance Survey (2015–2021), we identify the causal effect of financial literacy on wealth preservation through difference-in-differences and triple-difference models. Our findings reveal that while the pandemic hindered wealth accumulation, financial literacy provided a critical shield, significantly mitigating wealth losses. Two distinct channels for this protective effect are evidenced: financial literacy facilitates the adoption of digital financial tools and encourages portfolio diversification, thereby reducing household financial vulnerability. Crucially, heterogeneity analysis uncovers a significant substitution effect: the wealth-protective role of financial literacy is most potent in regions with underdeveloped financial infrastructure. In these resource-constrained environments, financial literacy acts as a cognitive surrogate for physical banking access, effectively offsetting institutional voids during systemic uncertainty. By characterizing financial literacy as a compensatory mechanism and a strategic substitute for physical infrastructure, this study provides forward-looking insights into how intangible human capital fosters household resilience. These findings underscore the need for targeted financial education as a strategic tool for economic stability, particularly for vulnerable groups in remote areas, to prevent the financial literacy gap from evolving into permanent economic inequality.