How does financial literacy and involvement in financial institutions affect black wealth?

Previous studies have been unable to fully explain why black wealth is on average lower than that of whites. Socioeconomic factors such as income and education obviously play a role, but a lot remains to be explained. In particular, recent reports in the popular press identify the degree of financial knowledge and overall trust in the financial industry as factors that may distinguish black from white saving behavior.

This paper uses data from the Panel Study of Income Dynamics (PSID) from 1968 to 2011 and annual data on the number and location of black-owned banks from the Chicago Federal Reserve to explore how financial knowledge and trust in financial institutions may affect both white and black wealth. We will estimate two models - one for blacks and one for whites - to examine the factors that affect their wealth. We will use both fixed and random effects techniques and evaluate which is the most appropriate method for the model.

Since personal financial characteristics are difficult to observe and measure, we include a number of proxies to try to capture these effects. The PSID can be matched from generation to generation, so we have data on a person's financial conditions during their upbringing, as well as parental education. We hypothesize that adults raised in wealthier households by parents who invested in a variety of financial assets grow up to be more assertive investors, which on average means higher wealth. We also use data on the number of black-owned banks over time and in locations near the respondents. We hypothesize that as blacks become more involved in the banking industry, particularly in institutions near their residence, they become more trusting in the motives of these institutions and may use them more often for saving.