This paper examines the impact of an observable “shock”, the birth of a son, on household financial activities in rural China. We propose theoretical channels that endogenously generate heterogeneity in the levels of financial activities on the basis of a child’s gender, even if parents do not possess discriminatory tastes, which we refer to as the “invest via a son” hypothesis compared to the conventional “taste for a son” explanation. Using nationally representative household data collected in 300 rural Chinese villages and econometric models that account for censored financial activities as well as endogenous fertility choices such as sex selection, we present strong evidence that having a son increases the amount of gifts and remittances a household receives from others by over 20%; it also increases both the amounts that a family loans and gives to relatives and friends. Moreover, having a son is found to increase household investments in both agricultural activities and family businesses while no type of expenditure increase with the arrival of a son, clearly consistent with our “invest via a son” hypothesis. Taken together, these results suggest that social onventions play important roles in household financial decisions that extend beyond the traditional role of budget constraints and consumption shocks.
