The life cycle model and household savings: Micro evidence from urban china

Type Journal Article - National Bureau of Demographic Dividends Revisited
Title The life cycle model and household savings: Micro evidence from urban china
Volume 21
Publication (Day/Month/Year) 2010
This study investigates the extent to which Chinaís high household savings rates
can be explained by the life cycle theory. First, we document that Chinese parents
depend on their children for support when elderly and that sons provide more support
than daughters. Second, we test the two predictions of a simple life-cycle model
that account for these two facts: 1) parents will increase savings when they have
fewer children; and 2) the reduction in fertility will increase savings more for parents
who have only daughters. To establish causality, we exploit the plausibly exogenous
decline in fertility in China caused by family planning programs which began
in the early 1970s and the fact that there was no sex-selection for our sample of
urban Chinese households that had children during the 1960s and 70s. Our results
show that for parents who have a daughter as the eldest child, having one child
less increases the savings rate by over 14,000 RMB, which is approximatley 27%
of average income; for those who have a son as the eldest child, there is no e§ect.
Finally, we apply our estimates to a simple life-cycle model of savings to predict the
level and rates of savings, and thus assess the extent to which the life-cycle model
can explain the data

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