The One-Child Policy and Household Savings∗

We ask how much the advent of the ‘one-child policy ’ can explain the sharp rise in China’s house-hold saving rate, and its distinct age-specific saving behaviour in the last three decades. In a life-cycle model with endogenous fertility, intergenerational transfers and human capital accumulation, we show a macroeconomic and a microeconomic channel through which restrictions in fertility raise aggregate savings. The macro-channel operates through a shift in the composition of demographics and income across generations. The micro-channel alters saving behavior and education decisions at the individ-ual level. Our quantitative OLG model calibrated to household level data shows that the policy can account for a third to 60 % of the rise in aggregate saving rate. Equally important, it can capture much of the distinct shift in the level and shape of the age-saving profile observed from micro-level data estimates. We then use data on twins (born under the one child policy) as an out-of-sample check to our quantitative results; estimates on saving and education decisions are decidedly close between model and data