Economic Literacy and Political Decision-Making

Democratic responsiveness depends on citizens’ ability to translate their preferences into informed policy choices. However, limited understanding of economic mechanisms and policy trade-offs may systematically distort this process. We investigate whether economic literacy—the understanding of basic economic concepts—enables citizens to better align their underlying preferences with their electoral decisions.
To investigate this, we develop and implement a novel survey module that measures economic literacy in a representative adult population in Germany. Psychometric analyses confirm the reliability and validity of our test instrument. While economic literacy correlates with education and cognitive skills, it captures a distinct concept with independent relevance for the formation of policy preferences.
Our findings show that policy preferences systematically vary with economic literacy. Economically literate citizens are more supportive of international integration and higher taxation, favor market-based climate policies but rather oppose more interventionist policies such as bans. Crucially, higher economic literacy is associated with better alignment between individuals’ underlying preferences, policy support, and partisan choices. Focusing on redistribution, we find that among equally inequality-averse citizens, those with higher economic literacy are more likely to support redistributive policies and parties.
We propose two mechanisms for these patterns. First, economic literacy could reduce belief noise when forming expectations about the economy. Second, it could promote flexible belief updating, allowing individuals to adjust their policy views to new information about social and economic trade-offs. Supporting evidence comes from three analyses: (i) economically literate respondents rely less on personal experience when assessing the overall economic situation in Germany, (ii) they hold better-anchored inflation expectations, and (iii) they respond more strongly to experimentally provided information on the social and economic costs of economic policies.
Overall, our findings highlight that a basic understanding of economic mechanisms seems to reduce the mismatch between citizens’ true underlying preferences and their electoral behavior and, therefore, could strengthen the capacity of democratic systems to respond to citizens’ true concerns.