Knowing When to Splurge: Precautionary Saving and Chinese-Canadians

TL;DR

This study uses a survey experiment to examine how precautionary saving behavior among Chinese-Canadians is influenced by welfare state features, finding that mandatory insurance reduces precautionary saving but cultural background does not.

Contribution

It provides experimental evidence on the impact of welfare policies and cultural factors on household saving behavior, addressing limitations of previous cross-country studies.

Findings

Mandatory insurance reduces precautionary saving.

Cultural background has no significant effect on saving behavior.

Results support the role of policy in influencing savings.

Abstract

Why do household saving rates differ so much across countries? This micro-level question has global implications: countries that systematically "oversave" export capital by running current account surpluses. In the recipient countries, interest rates are thus too low and financial stability is put at risk. Existing theories argue that saving is precautionary, but tests are limited to cross-country comparisons and are not always supportive. We report the findings of an original survey experiment. Using a simulated financial saving task implemented online, we compare the saving preferences of a large and diverse sample of Chinese-Canadians with other Canadians. This comparison is instructive given that Chinese-Canadians migrated from, or descend from those who migrated from, a high-saving environment to a low-savings, high-debt environment. We also compare behavior in the presence and absence of a simulated "welfare state," which we represent in the form of mandatory insurance. Our respondents exhibit behavior in the saving task that corresponds to standard economic assumptions about lifecycle savings and risk aversion. We find strong evidence that precautionary saving is reduced when a mandatory insurance is present, but no sign that Chinese cultural influences - represented in linguistic or ethnic terms - have any effect on saving behavior.