Three Essays on Applied Microeconomics

In these essays, I examine two broad topics in applied microeconomics using Chinese datasets: (i) intergenerational relationship between elderly parents and adult children; (ii) the effect of a tax reform on labor sector choices in rural China. The first chapter develops a theoretical framework for studying the residential choice of adult children in an intergenerational context. Parents value time spent with child regardless of whether the child provides any assistance and distance is a key determinant for the cost of this time transfer. Hence parents and parents-in-law have incentives to bid strategically for the proximity of married couple. The full characterization of the model leads to an equilibrium location pattern with single children locating significantly closer to their parents than married children. The model also predicts that there is no gender difference in residential choices among single children. However, on average married females will locate further away from parents than married males. Then I empirically analyze the location pattern using Taiwan Panel data and find that results are consistent with theoretical predictions. The second chapter examines reporting discrepancies over intergenerational exchange and support among 2,479 parent-child dyads drawn from Surveys of Health and Living Status of the Elderly in Taiwan. In line with previous literature, I find high degree of agreement between how adult children and elderly parents perceive their relationship. However, children consistently report greater level of exchange of assistance both from parents and to parents. I argue that this phenomenon is mainly due to the inconsistency of question wordings in the parents' and children's surveys. I then analyze whether the empirical results identify different effects of observable characteristics on transfer decisions, if reports from distinctive generations are used. I find that the conclusions remain largely unchanged under those different reports. The third chapter examines the labor supply response under an exogenous tax reform in rural China that changes the household level lump sum tax. Contrary to the standard economic theory, for households with increasing total tax payment I find a shift away from pure farm production to a combination of agricultural and nonagricultural sector employment. I hypothesize that this is because the reform increases the marginal risk premium in agricultural sector due to the uncertainty in farm production, imperfection of risk insurance market and decreasing absolute risk aversion. I then test this hypothesis by examining the heterogeneous treatment effects along several dimensions. First, I observe a shift from (nonagricultural) self employment to wage earning sectors. Then, I find treatment effect is larger for households facing greater risk in agricultural production. Finally, households' precautionary savings seem to increase in the treated group after the reform. All those observations are consistent with the theory predictions