“Confucianism, Social Norms and Household Saving Rates in China” by Jie Chen
National University of Singapore
Yale School of Management
We study the effect of (declining) Confucian social norms on human capital investment and saving rates in China. In our simple two-period model, parents have the option to invest in both a risk-free asset and the human capital of their child. We assume that social norms, and thus enforcement mechanisms, for supporting old-age parents may differ in each region. Consequently, these cultural norms for acceptable filial piety determine the probability of children’s non-performance on their repayment obligations to parents which in turn affects the variation in returns that parents can expect to receive from investing in their children. Modeling default by children as a function of the prevailing social norms gives us the flexibility to study the impact of the declining Confucian influence on China’s consumption-saving trends. Using data from the China Household Finance Survey, this paper adds to the current literature in several ways. First, we provide evidence supporting the key assumption in the life-cycle hypothesis: that parents do view their children, especially sons, as a source of retirement income. Thus, parents’ investments in children’s human capital are not altruistic; neither are intergenerational transfers from adult children to old-age parents. Second, we offer an alternative explanation for high household savings in China. That is, in addition to the One Child Policy and the gender imbalance-induced pressure to save more, the lack of financial development and the declining influence of Confucianism are also significant contributors to China’s ever-growing saving rates.