Implications of Differences in Cognitive Capabilities between Individuals and Small Businesses for Financial Regulation

Abstract

Individuals are better protected than businesses by means of regulations when they want to take a loan. This is based on the assumption that businesses make better financial decisions than consumers. While previous literature suggests that self-employed people have better cognitive capabilities than consumers, it is also reported that self-employed people face difficulties if they want to get a loan from which consumers are protected. This paper studies whether differences in financial literacy and numeracy exist between self-employed people and consumers, i.e. whether self-employed people have better cognitive capabilities that allow them to make better financial decisions. A dataset from the Netherlands (LISS Panel) and a dataset from Germany (SOEP) are used for this purpose. The paper provides evidence that differences in financial literacy and numeracy exist between self-employed people and consumers. Furthermore, the results show that financial literacy and numeracy have a positive effect on the probability to be self-employed.