Financial education has been part of the school system for some time, yet a broader concern with financial literacy, or financial capability, among the population as a whole is relatively new. The reasons for this are explored here. Those dynamics have led the Organisation for Economic Cooperation and Development (OECD) to undertake a two-part financial literacy project and to the creation of national agencies and strategies in the United Kingdom, the United States, and Australia. The US agency appears to be concentrating its efforts on the coordination of existing materials; the agencies in the United Kingdom and Australia appear to be especially successful in developing new materials.
Those national agencies are making rapid progress. National strategies have been conceptualized and documented. Websites have been created. Baseline surveys have been designed, undertaken, and published. Programs have been proposed and implemented to improve the financial literacy of specific populations such as school-aged children and adolescents, those who are working, the un and under banked, and those with credit problems. Evaluations have been undertaken of some of these programs.
Credit risk and market conditions are inherently linked. This link manifests itself in multiple channels. It has been documented that default probabilities and recovery rates vary through business cycles (see, e.g., Altman (1983), Acharya, Bharath, and Srinivasan (2007), Du-e, Saitaand Wang (2007), and Pesaran, Schuermann, Treutlerand Weiner (2006))). Market conditions can alsoafiectthe impact off firm characteristics on default probability and credit spread, because economically sensitiveflrms should beneflt more in economic expansions and sufiermorein economic recessions. Traditional structural models based on the seminal Merton (1974) model, however, have generally not properly accounted for these inherent connections and have consequently failed to match the levels of the observed credits spreads ("the credit spread puzzle").
Stigler (1961) observed that when consumers are not perfectly informed about prices they will need to search amongst competing firms to discover favourable prices, and proposed that this search process could provide some explanation for the degree of price dispersion observed in real markets. More recently, numerous commentators have suggested that one impact of the introduction of e-commerce will be a reduction in mark-ups that can be sustained by firms due to the increased ease with which consumers are able to compare alternative prices. Unfortunately the dominant, and most challenging, result in the theoretical search literature gives no support to either conjecture.
Diamond (1971) showed that when consumers search sequentially for one commodity, and search costs are strictly positive, the unique equilibrium will be at the monopoly price. When search costs are zero, however, the model reduces to a Bertrand pricing game for which the unique solution is at the competitive price. Diamond’s result generates several uncomfortable implications. Neither equilibria displays price dispersion and there is no search undertaken in equilibrium, so Stigler's conjecture that the search process will sustain price dispersion appears to be unjustified. Second, whenever search costs are positive all firms charge the monopoly price, irrespective of the size of the industry or the actual cost of search. A reduction in search costs will have no impact on the equilibrium price charged, providing the cost of search remains positive. Third, there is a fundamental discontinuity in the equilibrium outcome at zero search costs, when search costs are strictly positive the monopoly price results but at zero search costs the competitive price results. While his results demonstrate, rather dramatically, the potential impact of weakening the assumption of perfect information just a little – it seems unrealistic to suggest that firms can exploit small information imperfections quite so extremely.
