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| The Impact of the Universal Two-Child Policy on Time Preference: A Perspective Based on Family Fertility Behavior and Fertility Willingness |
| Yi Zhen, Xu Longqiang
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| School of Finance, Capital University of Economics and Business |
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Abstract Time preference is a trade-off between the present and the future. It is usually described by the rate of time preference, which is the discount rate of the marginal utility of future consumption. The higher the discounted value of future consumption utility, the lower the rate of time preference, the more people tend to consume in the future and the higher the savings. Therefore, time preference is the core factor that determines saving behavior.
Some existing studies have analyzed the changes in household saving, investment, and consumption behaviors caused by the fertility policy. However, the preference factors behind these behavioral changes have not been deeply investigated. This paper aims to quantify the impact of the universal two-child policy on the rate of time preference and to provide empirical evidence for predicting the future savings scale and the direction of savings structure adjustment in China. On the one hand, the adjustment of fertility policy can affect the scale of consumption and savings by changing households' future income and expenditure expectations. On the other hand, it can affect the structure of consumption and saving by adjusting the share of dependency expenditure in total expenditure.
The first work of this paper is to construct a time preference rate measurement model from the consumer intertemporal decision-making problem, and to estimate the rate of time preference using the two micro-databases of China Family Panel Studies (CFPS) from 2012 to 2018 and China Household Finance Survey (CHFS) from 2013 to 2019. Using the CFPS database, the average values of the RTP at the household level from 2012 to 2020 are 0.0239, 0.0278, 0.0225, 0.0291, and 0.0251 respectively. The time preference rates calculated using the CHFS database for the years 2015 and 2017 are 0.0259 and 0.0256. This can also be understood as the discount rate used by Chinese households in discounting future utility is 2.56 % and 2.58%. The utility of 1 unit in the future is discounted to the current utility of 0.9750(=1/(1+0.0256)) and 0.9748(=1/(1+0.0258)) units, which is close to the 3% commonly used in theoretical modeling.
The second work of this paper is to design four sets of experiments to examine the impact of the universal two-child policy on time preference from the perspective of fertility behavior and fertility intention. We identify the impact of the universal two-child policy on time preference using the PSM-DID method and find that the universal two-child policy leads to a decrease in the rate of time preference of Chinese households from 2.56 % to 1.84 %, and the corresponding discount factor increases from 0.9750 to 0.9819. The rate of time preference decreases by 0.72 percentage points, with a decrease of 28.13 %. This result is confirmed by multiple placebo tests and robustness tests.
The third work of this paper is to explore the heterogeneity of the impact of the universal two-child policy on the rate of time preference from four perspectives: household vulnerability, household happiness, household health, and expected economic uncertainty. The results show that the reduction effect of the universal two-child policy on the rate of time preference is more significant in households with higher economic vulnerability, higher level of happiness, higher level of health, and lower expected economic uncertainty, indicating that these households have a stronger motivation to save for their children.
The fourth work of this paper is to further analyze the impact of the universal two-child policy on household investment income. If the implementation of the universal two-child policy changes the rate of time preference of households, the preference adjustment will eventually affect household investment income and cause a change of the rate of return. Households that are considering having or have already had two children will prefer the future. The implementation of the universal two-child policy has led to a decrease in the share of enjoyable consumption, an increase in the savings rate, and a decrease in the rate of return on investment and the real rate of return for policy-sensitive households.
The marginal contributions of this paper are as follows: First, this paper focuses on the psychological variable of time preference and quantitatively analyzes the policy effect of implementing the universal two-child policy. This provides an interpretation with a preference perspective for understanding the change in household behavior caused by changes in fertility policy. Second, this study also provides evidence for understanding why and how preferences change. This paper finds that the psychological variable of time preference is affected by policy factors. This shows that preference is not a parameter set in the theoretical model and that the constant setting should be relaxed to describe reality. Third, this paper measures the rate of time preference parameters at the household level in China using the intertemporal consumption Euler equation, which provides a theoretical modeling reference for the subsequent research on the rate of time preference.
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Received: 15 September 2022
Published: 22 May 2025
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