The Impact of Financial Literacy on Negotiation Behavior

Abstract

This research investigates the role of financial literacy on initiating and achieving a favorable negotiation outcome in an employment context. With a goal of improving long-term financial well-being, extant research examines whether increasing a person’s understanding of basic financial concepts (hereafter “financial literacy”) improves his/her financial decision-making. The current research proposes broader effects of financial literacy via negotiation behavior. We follow prior research to measure financial literacy both objectively (as the accurate assessment of basic financial concepts, hereafter “financial knowledge”) and subjectively (as confidence in the application of basic financial skills and concepts, hereafter “financial confidence”). In a series of studies engaging students from undergraduate business courses and adults recruited from an online crowdsourcing service, this research first examines the correlation between these measures of financial literacy and (a) the likelihood of initiating a negotiation and (b) the likely outcome from a negotiation, if initiated. Results suggest that financial confidence impacts participants’ willingness to engage in negotiation, while financial knowledge impacts the level of participants’ first offer. This research then evaluates the causal impact of improvements in financial knowledge via feedback on participants’ own responses to financial literacy questions. The causal nature of the relationship is confirmed with feedback leading to improved measures of financial knowledge, which in turn increase participants’ first offer. These findings suggest financial literacy likely has important implications for career advancement and compensation, as well as the successful management of interpersonal communications, even in fields not traditionally thought of as focusing on numerical reasoning skills.

Keywords: financial literacy, financial knowledge, financial confidence, negotiation

JEL Classification: C91, D03, G02, M59