Rational Inattention, Tax Incentives, and Participation in Commercial Pension Insurance: Evidence from China and Theoretical Mechanisms

Abstract

This study investigates a critical gap in understanding the third-pillar pension reforms of China: whether tax incentives can effectively boost participation in commercial pension insurance under the constraint of rational inattention. Firstly, we used data from five waves of the China Family Panel Studies (CFPS) spanning 2014-2022, and employed difference-in-differences (DID) and difference-in-differences-in-differences (DDD) models for evaluating the pilot tax deferral policy. Our findings reveal that the tax-deferred pilot policy has failed to promote participation in commercial pension insurance, and rational inattention is a significant factor contributing to suboptimal policy outcomes. Subsequently, we constructed and solved a dynamic investment-consumption-contribution model incorporating wage growth uncertainty and the complexity of tax rate calculations. The results indicate that attention allocation is a crucial mechanism through which rational inattention exerts an influence on the effectiveness of tax deferral policies. Specifically, a reduction in the degree of rational inattention improves the accuracy of wage growth rate predictions and tax rate perceptions, significantly lowers information acquisition costs and thereby promotes the purchase of commercial pension insurance. This study uncovers the micro-mechanisms through which behavioral decision-making biases affect tax-deferred commercial pension insurance and provides both theoretical and empirical evidence for the improvement of the third-pillar pension system.

Keywords: Tax incentive, Third-pillar pension reforms, Limited rationality, Rational inattention, Policy evaluation