Does Adversity Affect Long-Term Consumption and Financial Behaviour?

Does Adversity Affect Long-Term Consumption and Financial Behaviour?: Evidence from China’s Rustication Programme

Fan, Yi

2017-06-30

In this paper I examine the long-term consequences of adversity on consumption and financial behaviour, using the largest forced migration experiment in history. From 1966 to 1978, 17 million urban youths in China, mostly junior or senior high school graduates, were sent to the countryside to do farm work for an average of three to four years under a rustication policy. Using data from the mini-census in 2005, I find that the rusticated generation behaves more conservatively than the non-rusticated generations over the long term, as they consume less housing and purchase more insurance and pension. In addition to the cross-generational influence, I investigate the intragenerational effects of rustication with data from the Chinese Household Income Project and the Chinese Twins Survey in 2002. A similar conservative behavioural pattern is revealed. Individuals with rustication experience spend less on housing, accumulate more saving and insurance, and invest less in risky assets, compared to their age-eligible but non-rusticated peers. Applying a habit-forming model, I suggest that one interpretation for the conservative behaviour lies in the habits formed during adversity. The results shed light on how a policy, especially in the early stage of life, influences one generation over the long term.

adversity
long-term effects
housing consumption
financial behaviour

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(c) 2017 The Author(s)