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Federal Reserve Bank of San Francisco
Working Paper Series
Breaking the “Iron Rice Bowl” and Precautionary Swings: Evidence from Chinese State-Owned Enterprises Reform
Hui He
Feng Huang
Zheng Liu
Dongming Zhu
Abstract

We use China’s large-scale reform of state-owned enterprises (SOE) in the late 1990s as a natural experiment to identify and quantify the importance of precautionary savings for wealth accumulation. Before the reform, SOE workers enjoyed the same job security as government employees. After the reform, a cumulative of over 35 million SOE workers have been laid off, although government employees kept their “iron rice bowl.” The change in unemployment risks for SOE workers relative to that of government employees before and after the reform provides a clean identification of income uncertainty that helps us estimate the importance of precautionary savings. In our estimation, we correct a self-selection bias in occupational choices and we disentangle the effects of uncertainty from pessimistic outlook. We obtain evidence that precautionary savings contribute to about one-third of the wealth accumulations for SOE workers between 1995 and 2002. Precautionary savings motive is thus an important factor that drives the observed rising Chinese saving rate.


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Hui He & Feng Huang & Zheng Liu & Dongming Zhu, Breaking the “Iron Rice Bowl” and Precautionary Swings: Evidence from Chinese State-Owned Enterprises Reform, Federal Reserve Bank of San Francisco, Working Paper Series 2014-4, Jan 2014, revised 14 Feb 2017.
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Keywords: Precautionary saving; uncertainty; structural change; self-selection bias; permanent income hypothesis; difference-in-difference methods
DOI: 10.24148/wp2014-04
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