Sarah Necker

Economic Literacy: Measurement, Expectations, and Policy Views

Abstract:  We study the population’s economic literacy—the understanding of basic economic concepts—and its importance for the formation of economic expectations and policy views. We device and implement a survey module to measure economic literacy in a representative adult population. Psychometric analysis supports the reliability and validity of the test instrument. While associated with education and intelligence, economic literacy captures a distinct and genuine concept. Subgroup differences in economic literacy suggest limited generalizability of prior analyses based on economics students. A strong age gradient indicates acquisition through life experience. Three analyses show that economic literacy enables voters to improve information processing and form policy views more coherent with their underlying preferences. First, economic literacy allows individuals to form better-anchored economic expectations. Second, economic literacy increases individuals’ responsiveness to experimentally provided information on policy trade-offs. Third, economic literacy leads to a closer alignment between voters’ preferences, policy views, and party choices.