The One-Child Policy and Household Savings

By Taha Choukhmane, Nicolas Coeurdacier and Keyu Jin

http://d.repec.org/n?u=RePEc:cpr:ceprdp:9688&r=dge

We ask how much the advent of the ‘one child policy’ can explain the sharp rise in China’s household saving rate. In a life-cycle model with endogenous fertility, intergenerational transfers and human capital accumulation, we show a macroeconomic and a microeconomic channel through which restrictions in fertility raise aggregate saving. The macro-channel operates through a shift in the composition of demographics and income across generations. The micro-channel alters saving behaviour and education decisions at the individual level. A main objective is to quantify these various channels in the data. Exploiting the birth of twins as an identification strategy, we provide direct empirical evidence on the micro-channel and show its quantitative relevance in accounting for the rise in the household saving rate since the inception of the policy in 1980. Our quantitative OLG model can explain from a third to at most 60% of the rise in aggregate saving rate; equally important is its implied shift in the level and shape of the age-saving profile consistent with micro-level estimates from the data.

The main mechanism at play in this paper are the transfers from children to parents, whose amount is decreasing in the number of children. Once parents are restricted to one child, they need to compensate with their own savings to obtain the desired level of consumption in retirement. The social convention that children help their parents and social security (rather, its absence) are left untouched to isolate the impact of the child policy. While the latter is big, it may be mitigated or amplified by social and institutional change that accompanied the child policy and may in fact be a consequence of it. A China specialist may weigh in here. It is nevertheless an interesting paper.

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