Precautionary savings behavior of Chinese farm households during institutional transition in the 1990s

An intertemporal dynamic household model explores determinants of the precautionary savings behavior of Chinese farm households, in response to a risky environment with incomplete financial and insurance markets and institutions in transition. Idealized parameters, estimated from a five-year panel of household survey data, are used in numerical simulations. Building on Deaton's precautionary role in consumption smoothing, household savings are a substitute for missing markets and institutional arrangements.; Combinations of advanced mathematical tools and new variants of statistical and computational techniques move the research through three consecutive stages. First, a mathematical representation nests a precautionary motive into the choice of functional form for the structure of intertemporal preferences. The analytical solution allows insights into the dynamic structure of a savings-consumption system with stochastic income processes as constrains.; Second, the dissertation goes beyond a single savings equation estimation and overcomes estimation difficulties. The coarseness of non-experimental survey data requires refinement and the data structure are converted into a dynamic stochastic process. While using SAS language to convert the data structure, it was found that the SAS language can accomplish simulations that usually require engineering or mathematical software. One breakthrough is that the simulation using SAS can incorporate statistical software and is not practically limited to a small number of case-depended variables.; With a variance-covariance analysis, the CALIS procedure peels off measurement errors in income and consumption and eliminates the contamination of savings data. Several new econometric tools and concepts are developed for this purpose. After transformation of the data and selection of estimation approach (3SLS), the parameters are matched to their econometric exactness with the theoretical model preferences.; Third, the savings behavior of US and Chinese households is compared through a dynamic simulation that projects Chinese savings behavior to {dollar}30,000 income levels. Chinese households are found to save twice as much as their American counterparts. Placing savings behavior into an idealized experimental scenario, a precautionary motive is confirmed, as households fend off uncertainty from deficiencies of social insurance arrangements. In rural China, farm households pay for their “insurance” individually. Market and institutional innovations to replace precautionary savings will increase social efficiency.