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| “Living in the Moment” or “Saving for the Future”? Long-Term Effects of Earthquake Experiences on Chinese Urban Household Savings Rates and Consumption Habits |
| ZHANG Yuan, LIU Qiannan
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| China Center for Economic Studies, Fudan University |
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Abstract Economic theory demonstrates that a household increases its precautionary savings rate over time to cope with natural disasters and smooth consumption. However natural disasters such as earthquakes, floods, droughts, hurricanes, and insect plagues have different effects on households, and thus the empirical testing of combinations of different kinds of natural disasters will generate biased estimates.
Approximately 2.7 billion people worldwide live in areas that are considered seismic zones, but the economic literature inadequately depicts their consumption and saving patterns. This paper holds that earthquakes, unlike other natural disasters, threaten the lives of people who dwell in seismic zones, and thus trigger fear and anxiety in these people. Consequently, those who live in seismic zones may have different consumption and savings habits than those who live in non-seismic zones. This paper hypothesizes that the long-term effect of earthquakes results in residents living in a seismic zone exhibiting a “living in the moment” attitude, which affects their consumption and saving habits. Specifically, although the experience of earthquakes has no significant long-term effects on levels of household income, the earthquake-associated risk of death and psychological shock has significantly positive effects on hedonic consumption, which reduces rates of household saving.
This paper uses nationally representative household survey data from the National Bureau of Statistics of China that covers 18 provinces from 2002 to 2009 and conducts empirical tests to obtain the following conclusions. First, each experience of an earthquake (ML ≥ 4.5) reduces the rate of household savings by 0.2 percent point . Second, the frequency of earthquakes experienced by household heads does not have significant long-term effects on levels of household disposable income, but does have significant positive effects on levels of household consumption. Third, an increase in the frequency of earthquakes experienced by household heads leads to an increase in household hedonic consumption (such as the consumption of cultural entertainment, non-essential health care, cosmetology, and luxury goods), but has no effect on non-hedonic consumption. Fourth, several robustness checks are carried out (e.g., controlling for the frequency of earthquakes when household heads were 7 years old and controlling for the experience of earthquakes with an ML > 6) on subsamples that did not migrate from a seismic zone, and the above conclusions remain valid. Fifth, empirical evidence from migrant workers suggests that the endogeneity problem in the empirical models does not affect the conclusions.
This paper contributes to academic research and policymaking in China. In terms of academic research, this paper's first contribution is to the literature on the effect of earthquakes on household consumption and saving patterns, as it provides empirical evidence from urban China. It also provides evidence from economic research to the psychology literature, revealing the effect of the risk of earthquake-associated death on individual consumption behaviors; this has implications for the optimal location of companies that provide hedonic products or services. Second, this paper helps to explain the savings rates in China from the perspective of consumption behavior shaped by earthquakes.
In terms of policymaking, this paper's first contribution is to highlight a way to promote domestic consumption. China has a very high household savings rate compared with other developing and developed economies, and the Chinese government consistently endeavors to promote domestic consumption to boost economic growth. In recent years, the Chinese government has emphasized the need for reform on the demand side and on the supply side to better match both sides and thus improve economic growth. China has a huge domestic market, which serves as a substitute foreign market, and this suggests that improving domestic demand rather than export demand will be fruitful, especially as the China-US trade relationship is not healthy. Thus, this paper indicates that policies aimed at promoting domestic consumption should focus on reshaping consumption habits, i.e., encouraging spending on cultural entertainment, non-essential health care, and other hedonic consumption. Second, the coronavirus disease 2019 (COVID-19) pandemic is also a natural disaster, and it warrants more academic research. The conclusions from this paper suggest ways to determine the effects of the COVID-19 pandemic on household consumption and savings rates. The findings of this paper also suggest that new COVID-19-associated habits, such as mask-wearing and the frequent use of hand disinfectants, will have long-term effects on consumption habits and household savings rates.
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Received: 29 June 2020
Published: 02 September 2021
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