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How does financial literacy affect households’ financial fragility? The role of insurance awareness

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  • Chen, Chuna
  • Tan, Zhuomin
  • Liu, Song

Abstract

This paper investigates the impact of household heads' financial literacy on households' financial fragility. We estimate a panel probit model by employing panel data from four waves (2015, 2017, 2019, and 2021) of the China Household Finance Survey (CHFS) with 58,802 observations. We focus on the mediating role of insurance awareness. First, enhanced financial literacy significantly mitigates households’ financial fragility, with insurance participation emerging as a crucial mechanism. Second, our cross-sectional analyses show that the beneficial effects of financial literacy are more pronounced in households not constrained by wealth or cognitive skills, as well as households with lower health risks and those located in the central and western regions of China. Third, we identify that financial literacy, through its distinctive financial knowledge attributes, offers unique contributions to reducing household financial fragility, separate from general cognitive abilities. Last, we highlight peer effects in the influence of financial literacy on financial fragility, predominantly driven by social norms.

Suggested Citation

  • Chen, Chuna & Tan, Zhuomin & Liu, Song, 2024. "How does financial literacy affect households’ financial fragility? The role of insurance awareness," International Review of Economics & Finance, Elsevier, vol. 95(C).
    • Handle: RePEc:eee:reveco:v:95:y:2024:i:c:s1059056024005100
    DOI: 10.1016/j.iref.2024.103518
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    More about this item

    Keywords

    Household financial fragility; Financial literacy; Insurance awareness; Insurance participation;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • G53 - Financial Economics - - Household Finance - - - Financial Literacy
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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