Social Norms and Household Savings Rates in China

Abstract

We study the effects of Confucian social norms on savings rates in China. In our simple two-period model, parents have the option to invest in either a risk-free asset or their children’s human capital. We assume that the filial piety norms and thus the enforcement mechanisms for supporting old-age parents differ across regions. Consequently, the probability of children’s non-performance of their repayment obligations to parents and the returns parents can expect from investing in their children vary. We test the model predictions using data from the China Household Finance Survey (CHFS). We find that stronger Confucian social norms reduce the gap in the savings rate between families with sons and with daughters. Modelling default by children as a function of the prevailing social norms gives us the flexibility to study the impacts of declining Confucian influence on consumption–savings trends in China.