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Accounting for Social Spending Escalation in Rural China

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  • Chen, Xi

Abstract

It has been widely recognized that the poor spends a significant proportion of their income on social spending even at the expense of basic consumption. What are the motives behind the observed lavish social spending among the poor? We attempt to test three competing explanations at the social link level, risk pooling, peer effect, and status concern, via a uniform framework based on a unique primary dataset. The data set include household information from a three wave census type household survey as well as a long term gift record for all households in three villages in a poor region in rural China. Our dyadic estimations confirm the prevalence of peer influence and the status seeking motive in shaping gift spending and its rapid growth, while risking pooling is not a significant explanatory factor. A 1% increase in peers’ gift spending per occasion leads to a 0.13% 0.34% increase in one’s own gift per occasion, depending on whether household fixed effect or pairwise fixed effect dyadic model is estimated. Status seeking for the bottom 25% and the middle 50% groups significantly pushes up gift expenditure. Moreover, large windfall income and marriage market pressure further intensify status competition, escalating gift giving behavior.

Suggested Citation

  • Chen, Xi, 2011. "Accounting for Social Spending Escalation in Rural China," Papers 115516, 2011 IAMO Forum, June 23-24, 2011, Halle (Saale), Germany.
    • Handle: RePEc:ags:iamo11:115516
    DOI: 10.22004/ag.econ.115516
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    References listed on IDEAS

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    1. Santos, Paulo & Barrett, Christopher B., 2010. "Identity, Interest and Information Search in a Dynamic Rural Economy," World Development, Elsevier, vol. 38(12), pages 1788-1796, December.
    2. Joel Waldfogel, 2002. "Gifts, Cash, and Stigma," Economic Inquiry, Western Economic Association International, vol. 40(3), pages 415-427, July.
    3. Chen, Xi & Zhang, Xiaobo, 2011. "Costly Posturing: Relative Status, Ceremonies and Early Child Development," Papers 115517, 2011 IAMO Forum, June 23-24, 2011, Halle (Saale), Germany.
    4. Antoni Calvó-Armengol & Eleonora Patacchini & Yves Zenou, 2009. "Peer Effects and Social Networks in Education," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 76(4), pages 1239-1267.
    5. Brown, Philip H. & Bulte, Erwin & Zhang, Xiaobo, 2011. "Positional spending and status seeking in rural China," Journal of Development Economics, Elsevier, vol. 96(1), pages 139-149, September.
    6. Fafchamps, Marcel & Gubert, Flore, 2007. "The formation of risk sharing networks," Journal of Development Economics, Elsevier, vol. 83(2), pages 326-350, July.
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    Cited by:

    1. Comola, Margherita & Prina, Silvia, 2014. "Do Interventions Change the Network? A Panel Peer-Effect Model Accounting for Endogenous Network Changes," IZA Discussion Papers 8641, Institute of Labor Economics (IZA).

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    Keywords

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    JEL classification:

    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • R20 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - General

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