WEALTH SHOCK AND HOUSEHOLD ECONOMIC DECISIONS: A DIFFERENCE-IN-DIFFERENCE ANALYSIS OF CHINA'S LAND ACQUISITION

Abstract

This paper investigates the impact of land acquisition in China on the economic decisions of households. I employ a Difference-in-Difference strategy to compare the outcomes in spending and assets, labour participation, human capital, and experience with local government between households that experienced land acquisition one year before and those that did not. I find that total and entertainment expenditures increased significantly, and the overall marginal propensity to consume (MPC) after one year is consistent with the permanent income hypothesis (PIH)’s prediction. Households increased savings and decreased non-housing debts by a much larger extent, suggesting that they are not squandering the one-off compensation. Business investments are unaffected, but there is a significant increase in human capital investment in health. Working hours decreased significantly, and adults in treated families had more negative experience with the local government. Heterogeneity analyses of spending response reflect no effects by household liquidity constraint or time horizon.