Financial literacy, institutions and education: Lessons from the German reunification

Abstract A growing body of literature highlights the importance of financial literacy in affecting household choices. However, much fewer studies focus on understanding the determinants of different levels of financial literacy. Our paper contributes to filling this gap by analyzing a specific determinant, i. e., the educational system, to explain the heterogeneity of financial literacy scores across Germany. The results suggest that the lower financial literacy observed in East Germany can be partially attributed to the different institutional framework experienced during the Cold War, more specifically, to the socialist educational system experienced in East Germany, which affected specific cohorts of individuals. By exploiting the unique set-up of the German reunification, we identify education as a channel through which institutions and financial literacy are related in the German context. In support of this hypothesis, we find that individuals exposed to the Eastern educational system exhibit 12 %12\hspace{0.1667em}\% to 21 %21\hspace{0.1667em}\% lower financial literacy scores compared with the households in the control group, not exposed to such system.