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
Citation
SONG, Changcheng.
Financial illiteracy and pension contributions: A field experiment on compound interest in China. (2020). Review of Financial Studies. 33, (2), 916-949.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/6516
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.1093/rfs/hhz074