A Study On Chinese Households Behaviour Based On Habit Formation

Since1990s, domestic Consumption demand, especially the continuously low households demand has become a difficult problem which troubled the sustainable development of Chinese economy, and in the current global financial crisis, this problem becomes even more conspicuous. Under these circumstances, consumer behavior has recently become one of China's major economic issues.Habit formation as a special utility theory gradually gained the mainstream researchers' attention since1990s due to its reasonable explanation of consumption excess sensitivity and smoothness problem caused by rational expectation permanent income hypothesis, on the other hand, the habit formation can reflect the internal logic behind the consumer decision-making behaviour. Furthermore, habit formation theory has positive impact in other economics research field, such as the capital asset pricing, business cycle and monetary policy. Based on this, the systematic study of Chinese rural and urban household consumption behaviour is valuable.This paper follows an idea of theory, empirical research and conclusion, and consists of seven chapters. Chapter one gave an introduction of background, framework and method for this study. In chapter two, the author reviewed and commented the habit formation theory to provide theoretical and empirical support for the follow-up research. Taking the system and economic environment changes into consideration, chapter three discussed the impacts of uncertainty of income and expenditure, liquidity constraints, changes of population age structure on consumer behaviour during the transition period of economy development, and get the preliminary conclusion which will also provide theoretical support of variable selection, parameters explanation in the following empirically research. In chapter four, the author introduced habit formation and uncertainty into the framework of inter-temporal optimization, focusing on an investigation of how habit formation and uncertainty affect consuming behavior of rural and urban residents. In chapter five, the author incorporated the internal habit formation and external habit formation into the traditional AIDS demand system, and tested the impact of internal habit formation of rural household's expenditure and urban households' demonstration effect (external habit formation) to rural households' consumption behaviour. Based on the above research, chapter six studied the relationship among economic growth, social system transition and habit formation so to answer the relationship between China's high economic growth and high savings, and the impacts of the intensified economic system reform on household habit formation. Chapter seven put forward some corresponding suggestions.This study concluded that the habit formation is an important explanatory variable which affect the consumption of Chinese urban and rural households. Habit formation is similar to the prudence, the larger the habit formation parameter is, the smaller the income elasticity of consumption is, and the more household savings is, China's high savings rate of urban and rural households is highly related to causality. On the other hand, habit formation which leads to the "habit savings" reduce the uncertainty of the impact on household consumption, which means that the larger habit formation parameter is, the smaller impact of uncertainty on household consumption is. In addition, despite the habit formation to some extent reduce the impact of uncertainty, uncertainty is still an important explanatory variable which affecting the consumption of Chinese urban and rural households. The study of rural households consumption structure has shown that consumption of rural and urban households interact, that is the positive external habit formation effects, mainly concentrated on the expenditures of transport and communications, education, cultural, recreation services and health care and medical services, these consumption expenditures has obvious "productive consumption" characteristics, and to some extent shows that consumption of rural residents have a relatively strong rational characteristic, rather than blind comparisons. The studies of the relationship between economic growth and the consumer habits have shown that the continued high growth enhanced the "Consumer memory" of households, which making habit formation parameters become larger, and the consumer has become more prudent. The study conclusion provides an interpretive approach of China's high economic growth leading to high savings. This also demonstrates that the quality of China's economic growth needs to be improved, a series of social-economic problems caused by high-growth mode brought about a serious impact on consumer attitudes. The study of relationship between economic system transition and habit formation shows that intensified economic system reform has significant impact on the residents' habit formation. From another angle, the conclusion shows that consumption issue is not only the decision-making process of household, but also system arrangement is an important influence factor.Based on above mentioned studies, this paper proposes some corresponding policy suggestions, which mainly focus on the formation of domestic demand, in order to promote China's economic transformation to a more balanced development approach, such as transforming the economic growth mode positively, improving the quality of economic growth, consummating the social security system, narrowing the income gaps, standardizing the development of real estate industry and developing consumer credit etc.