Essays on Demographic Issues in China

Title of Dissertation: ESSAYS ON DEMOGRAPHIC ISSUES IN CHINA Xue Li, Doctor of Philosophy, 2011 Dissertation Directed By: Professor John Rust Department of Economics Chapter 1: Why Is the Sex Ratio Unbalanced in China? The Roles of the One-Child Policy, Underdeveloped Social Insurance, and Parental Expectations The sex ratio imbalance in China has reached such an alarming level that, by 2020, men of marriageable age are estimated to outnumber women by 24 million. Using a calibrated life-cycle model, this paper examines the rising sex ratio through three linked but different perspectives: one-child policy, social insurance program, and parental expectation. In a dynamic fertility choice framework, a couple’s decision on sex selection is motivated by better returns from investing in a son than in a daughter. I also consider the largely overlooked effect of expected sex imbalance on current fertility choices. The benchmark calibration demonstrates three results. First, moving to a one-andhalf-child policy (second allowed if the first is a girl) would dramatically decrease the sex ratio at birth from 125 to 106. Second, if parents are adaptive and take the “cannot-marry” risk into consideration, then the sex ratio under the one-child policy will drop from 125 to 110, while the change in population growth is negligible. Third, when social insurance coverage is universal, the sex ratio only changes by a small amount if parents do not modify their expectation on children’s transfer. I also investigate the equilibrium sex ratio when couples are fully rational and forward-looking. If more couples behave in such a manner, the sex ratio would fall; this suggests that publicity and education could help alleviate the sex imbalance problem in China. In a similar spirit, I consider the issue of endogenizing children’s transfer to parents. In an infinite-horizon dynastic model, the equilibrium level of transfer is positively related to the attention parents place on grandparents’ welfare. Finally, I show that if social insurance could change the social attitude on expected child transfer, then it has the potential to significantly reduce the sex ratio. Chapter 2: Risky Child Investment, Fertility and Social Insurance in China This paper tries to explain the decline in total fertility rate (TFR) in China by investigating the quantitative effect of social insurance on peoples’ fertility choice in an environment where investment in children is risky. The price and income effects of social insurance are heterogeneous depending on peoples’ position in the income distribution: low-income people tend to raise more children due to the reinforcing income and price effects, whereas for rich families the income effect dominates the price effect so that their fertility declines in the presence of the social insurance program. Our results based on Chinese economy do not support the hypothesis that increasing social insurance tax rate has a negative impact on fertility rate, as argued in Boldrin, Nardi, and Jones (2005). Through decomposing calibration results under hypothetical policy scenarios and simulating TFRs for various parameter values, we show that liquidity constraints created by a public pension program plays a significant role in reducing fertility rate. Factors related to the rate of return on child investment, such as a slowing economic growth, a rise in the cost of childbearing, and potential social attitude changes such as expectations of lower transfers, also contribute to the long-term declining trend in fertility observed in the data. ESSAYS ON DEMOGRAPHIC ISSUES IN CHINA