Confucianism, Social Norms and Household Savings Rates in China

Abstract

We study the effect of (declining) Confucian social norms on human capital investment and savings rates in China. In our simple two-period model, parents have the option to invest in either a risk-free asset or the human capital of their child. We assume that social norms, and thus enforcement mechanisms, for supporting old-age parents may differ across regions. 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 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 to support the key assumption in the life-cycle hypothesis in Modigliani and Cao [2004] that parents view their children, especially sons, as a source of retirement income. Thus, parents’ investment in children’s human capital is not altruistic; nor are intergenerational transfers from adult children to old-age parents. Second, we offer an alternative explanation for high household savings in China. 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 rising savings rates.