Publication Type

Journal Article

Version

submittedVersion

Publication Date

2-2020

Abstract

I conduct a field experiment to study the relationship between peoples’ misunderstanding of compound interest and their pension contributions in rural China. I find that explaining the concept of compound interest to subjects increased pension contributions by roughly 40%. The treatment effect is larger for those who underestimate compound interest than for those who overestimate compound interest. Moreover, financial education enables households to partially correct their misunderstanding of compound interest. I structurally estimate the level of misunderstanding of compound interest and conduct a counterfactual welfare analysis: lifetime utility increases by about 10% if subjects’ misunderstanding of compound interest is eliminated.

Keywords

Pension, Retirement savings, Financial Education, Exponential Growth Bias, China

Discipline

Asian Studies | Finance and Financial Management

Research Areas

Finance

Publication

Review of Financial Studies

Volume

33

Issue

2

First Page

916

Last Page

949

ISSN

0893-9454

Identifier

10.1093/rfs/hhz074

Publisher

Oxford University Press (OUP): Policy F - Oxford Open Option D

Copyright Owner and License

Authors

Additional URL

https://doi.org/10.1093/rfs/hhz074

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