Essays on household financial decision-making: Evidence from Indian households

This dissertation aims to understand the role of financial knowledge in India and its role in explaining financial participation within the human development framework. It contributes to the literature on understanding social and behavioral attributes influencing the financial decisions of the households. The dissertation chapters explore the household's financial decisions related to their selection of financial products. Financial product choice has been an intriguing question for household finance experts across the years and has paramount importance in influencing households' lifetime utility. Underlining the socioeconomic heterogeneity of an emerging market such as India, the dissertation explores how financial knowledge can help boost financial participation and act as a social enabler in healing societal discrimination. The dissertation has four substantive chapters. The first of the four chapters examine the role of financial knowledge in helping financial awareness about the existence of financial products in India. The chapter introduces a novel scoring methodology summarizing the understanding of seven dimensions of financial concepts. The empirical results of the chapter show that financial knowledge helps in financial awareness related to the availability of financial products. It further helps in financial participation. The emergence of financial markets and the adoption of financial austerity by governments worldwide have shifted the financial responsibility on the households. In the backdrop of their increased role in financial decision-making, households' financial knowledge and financial awareness have gained paramount importance in shaping their lifetime utility by helping them in financial participation. The chapter concludes by underscoring financial knowledge as a policy instrument in boosting financial participation. The second chapter examines the role of financial unawareness in impeding financial participation. It characterizes the conditions for conscious and unconscious non-participation decisions using a theoretical framework. The framework classifies the overall awareness of a household into two components. The first component is innate awareness, which household acquires as an outcome of their natural ability to pay attention. The second component of awareness is acquired awareness, which households receive at a cost by investing their physical endowments such as financial knowledge. The framework characterizes two scenarios of financial non-participation, namely conscious non-participation, and unconscious non-participation. In the case of conscious non-participation, household consciously chooses not to hold the financial product when they are sufficiently aware of the financial product's costs and benefits. In unconscious non-participation, the household lacks the necessary knowledge about the cost and benefits of the products. Due to a lack of sufficient awareness about the product, they do not participate. Also, they choose not to acquire additional awareness by selling their physical endowments as they think that even after selling their physical endowment, they cannot acquire sufficient awareness about the cost and benefits of the products. As a result, they remain out of financial markets due to insufficient financial awareness. In the backdrop of these two scenarios of non-participation, the chapter has a policy implication about reducing the cost of acquiring financial knowledge, so households have to sell less to earn financial awareness and avoid non-participation due to lack of awareness. The third chapter of the dissertation examines the role of financially literate women in managing their household finances. The empirical results show that responsible, financially literate men and women constitute a healthy decision-making team when they work to their strength. Jointly men and women outperform the other decision-making peers such as sole men or women. The responsible, financially literate women participate more in saving schemes, insurance products, and alternative investments and are less involved in saving money at home/informally and borrowing money from money lenders. On the other hand, financially literate male decision-makers participate more in investment products, stocks/shares, and debt products. The chapter observes considerable heterogeneity in the role of women in household decision-making across castes. It finds financial literacy's effective gains diminish going down the caste hierarchy from the privileged caste to lower caste households, where cultural norms are more binding. The chapter recommends a policy intervention to equip women with financial literacy and encourage a husband-and-wife team to manage their household's financial portfolios jointly. The fourth chapter investigates how the caste-based discrimination in economic outcomes (namely, financial awareness and product holdings) hinders the financialization of the administrative districts. The empirical results show the districts with a higher level of caste-based discrimination suffer from a lower degree of financialization. The chapter considers crime reporting in India as a measure of institutional development as there are independent studies which suggest that a majority of crime incident does not get reported in India. Empirical results from the chapter show that caste-based discrimination fuels caste-based riots and discourages the reporting of general crimes such as burglary, cheating, dacoity, forgery, kidnapping, robbery, and theft. Together with the earlier three chapters, the dissertation advocates financial knowledge as a policy tool that not only helps individuals attain their full economic potential but also helps the social and institutional development of society