When a Son is Born: The Impact of Fertility Patterns on Family Finance in Rural China ∗ Weili Ding Queen’s University Canada Yuan Zhang Fudan University China March 2011 Abstract This paper examines the impact of an observable ”shock”, the birth of a son, on household finance and investment in rural China. We propose a mechanism that endogenously generates heterogeneity in the levels of financial activities and investments on the basis of a child’s gender, assuming parents do not possess discriminatory taste against a daughter. We refer to this mechanism 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 decisions, especially sex selection, we present strong evidence that having a son increases the amount of gifts and remittances a household receives from friends and relatives, it also increases the amounts that a family loans and gives to others. 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” mechanism. Taken together, these results suggest that social conventions play important roles in household financial decisions that extend beyond the traditional role of budget constraints and consumption shocks. * We wish to thank seminar participants at the Vrije University Amsterdam, University of Porto, 2010 AAS Annual Meeting, 2010 CEA Annual Meeting, 2009 NBER China Conference, CCES-Yale Develop- ment Economics Conference at Fudan and the 2009 China Summer Institute for helpful comments and suggestions on earlier drafts. We are grateful to Steven Lehrer for many helpful discussions and sugges- tions. Ding wishes to thank SSHRC for research support. Please direct correspondence to Weili Ding at dingw@queensu.ca. 1