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Borsa Istanbul Review 22-5 (2022) 1005–1019
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Full Length Article

Confucian culture and informal household financing: Evidence from China's

counties
Xiaohui Hou a,*, Rui Yang a, Chun Liu b
a
School of Economics and Finance, Xi'an Jiaotong University, PR China
b
School of Economics, Southwestern University of Finance and Economics, PR China
Received 12 June 2022; revised 21 July 2022; accepted 21 July 2022
Available online 5 August 2022

Abstract

A growing body of literature is investigating the social and cultural determinants of household financing activity. This paper examines the
impact of traditional culture, specifically Confucian culture in China, on informal household financing at the county level. We find that Confucian
culture has a significant and positive impact on informal household financing activity, and a higher degree of digitally inclusive finance can
strengthen the positive relation between Confucian culture and informal household financing. This positive relation between culture and financing
appears to be stronger in regions where Chinese traditional culture is well preserved and more pronounced in regions with a better business
environment. Our study offers insights for policy makers, revealing the importance of the impact of cultural factors on informal financial activity
in emerging economies based on their particular cultural traditions.
Copyright © 2022 Borsa İstanbul Anonim Şirketi. Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license
(http://creativecommons.org/licenses/by-nc-nd/4.0/).

JEL classification: D14; G19; Z10

Keywords: Confucian culture; Household finance; Informal financing activities

1. Introduction growth in an economy in which formal financing is also

The role of informal financing, which occurs without a
formal financial intermediary between borrowers and savers in
economic development, particularly in emerging economies,
has come to the fore in recent years. Informal financing in-
cludes trade credit, private money houses, pawnshops, com-
munity cooperatives, and interpersonal borrowing (money from
friends or family). To differentiate formal from informal
financing, Kandori (1992) and Udry (1994) document the na-
ture of self-enforcing contracts for repayment, as opposed to
social sanctions. Allen, Qian, and Xie (2019) confirm the
crucial role of informal financing in supporting economic
* Corresponding author. P. O. Box 1787, Xi'an Jiaotong University, Xian
Ning West Road No.28, 710049, Xi'an, Shaanxi Province, PR China.
E-mail address: hxiaoh2006@163.com (X. Hou).
Peer review under responsibility of Borsa İstanbul Anonim Şirketi.
available. Ahamed, Ho, Mallick, and Matousek (2021) show
that areas with more informal lending tend to have less inclu-
sive formal banking, which implies a substitution relationship
between informal and formal finance.
China has achieved rapid economic growth in the past few
decades, but financial repression and variations in the flow of
capital remain systemic characteristics of China's financial
system (Allen, Qian, Zhang, & Zhao, 2013). The financial
system is not yet able to cope adequately with the considerable
financing demand by the many small and micro enterprises and
households. One of the enduring puzzles is how China ach-
ieved rapid economic growth with an underdeveloped financial
system.
Allen, Qian, and Gu (2017) provide an overview of China's
financial system, concluding that the informal alternative
financial sector played a significant role in supporting the
growth of the most active sector of the economy, compared to

https://doi.org/10.1016/j.bir.2022.07.007
2214-8450/Copyright © 2022 Borsa İstanbul Anonim Şirketi. Published by Elsevier B.V. This is an open access article under the CC BY-NC-ND license (http://
creativecommons.org/licenses/by-nc-nd/4.0/).
X. Hou, R. Yang and C. Liu
the formal sector of the financial system, including a large
intermediation sector with dominant state-owned banks and a
rapidly growing capital market. This informal sector supported
the growth of a hybrid sector with various structures of
ownership and coexisted with the formal financial sector to
provide more financing sources for the private sector and
households to improve the efficiency of resource allocation
across the economy. Allen et al. (2019) distinguish constructive
informal financing, such as trade credit and family borrowing
that relies on information advantages and altruistic relation-
ships, and underground financing, such as money lenders who
use violence as a means of enforcement. In this study, using the
China Household Finance Survey, we focus on informal
household financing—that is, family borrowing—in Chinese
counties.
Specifically, we empirically investigate the impact of
China's Confucian culture on informal household financing.
We choose households at the county level as our sample
because the current controversy in the literature regarding the
role of informal financing comes primarily from Chinese evi-
dence (Allen et al., 2019) and because traditional culture is
preserved at the county level to a greater extent than the city
level due to its higher degree of modernization. Additionally,
households often rely on financial services and instruments.
This household financing, as a part of informal financing, has
attracted substantial academic attention and has formed a lively
stream in the literature (Guiso & Sodini, 2013). In informal
family financing, households must make many decisions that
are unrelated to the focus of firms, investors, and financial
institutions, which sets them apart from other economic agents.
In particular, many households have limited access to credit,
which reduces their welfare immensely because it restricts their
ability to transfer resources intertemporally and smooth con-
sumption over time.
As of 2013, more than 40 percent of China's rural house-
holds engaged in private lending, which substantially bridged
the gap between supply and demand in the rural lending
market, which has severe information asymmetry. Families
borrow money from relatives, friends, colleagues, and private
financial firms, rather than commercial banks and rural credit
cooperatives. Because it is difficult for formal financial in-
stitutions to obtain or confirm information on a potential bor-
rower's repayment ability, households tend to seek funding
from informal sources in rural areas, and this informal
financing enhances household income and reduces rural
poverty (Gan, Yin, & Tan, 2016).
Guiso and Sodini (2013) also emphasize that household
financing decisions, and their outcomes, are often shaped by
the institutional environment in which they are made. For
example, in the absence of the historical and cultural reasons, it
would be difficult to explain why households in the US pre-
dominantly rely on fixed-rate mortgages and households in the
UK primarily use variable rates. However, the impacts of
institutional factors on household financial decisions are largely
overlooked in corporate finance and are not emphasized in
asset pricing theory. Hence, studying household financial de-
cisions requires consideration of the heterogeneity of
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Borsa Istanbul Review 22-5 (2022) 1005–1019
household characteristics and the variety of institutional envi-
ronments in which households operate.
Ménard and Shirley (2008) demonstrate that, to reduce risk
and transaction costs, humans create formal institutions,
including writing and enforcing constitutions, laws, contracts,
and regulations, and informal institutions, such as structuring
and inculcating norms of conduct, beliefs, and habits of
thought and behavior. The formal and informal institutions
develop systemic modes of organization that are embedded in
these settings and provide different incentives, which vary in
their capacity to motivate agents. According to Ménard and
Shirley (2008), the performance of a market economy de-
pends on the institutions and modes of organization that
facilitate private transactions and cooperative behavior.
Nee and Swedberg (2008) assert that the stability of
informal institutional elements—traditional cultural customs,
norms, and beliefs—combined with a distinct constellation of
interests accounts for path dependence in institutional ar-
rangements. Traditional culture can shape different arrange-
ments that support production, exchange, and intertemporal
resource allocation. The role of culture in financial activities
has gaining increasing attention (Bitar, Hassan, & Saad, 2020;
Trinh, Nguyen, Sgro, & Pham, 2020). Despite the growing
body of literature on household finance (Guiso & Sodini,
2013), how traditional culture affects informal household
financing remains unclear. To fill this research gap, we inves-
tigate the impact of Confucian culture on informal household
financing in the context of rural China. Confucian culture as a
state philosophy helped to promote social order and stability by
defining justifiable methods, legitimating justice in human re-
lationships through defining duties, responsibilities, and rights
among individuals and groups and accommodating and
compromising with groups that have conflicts of interest. Thus,
Confucian culture is expected to have important effects on the
achievement of harmonious relationships, enhancement of
mutual trust, and compromise in terms of the conflicting in-
terests between borrowers and lenders, therefore, reducing
transaction costs and information asymmetry in informal
household financing activities.
Confirming our conjecture, our empirical results show that
Confucian culture has a significantly positive impact on
informal household financing. Additionally, a higher degree of
development of digitally inclusive finance can strengthen the
positive association between Confucian culture and informal
household financing. This positive association appears to be
stronger in regions where Chinese traditional culture is well
preserved and is more pronounced in regions with a better
business environment.
Our study contributes to the household finance literature by
focusing on informal household financing. We also identify
traditional culture as a determinant of decisions on informal
household financing in China, a large emerging economy. Our
study also sheds light on the relationship between culture and
finance. Modernization and economic transformation are pro-
ceeding in countries around the world, however, little is known
about the role of traditional culture in current financial activ-
ities. Our results have contemporary relevance, as a debate
X. Hou, R. Yang and C. Liu
concerning the role of cultural traditions in transitional econ-
omies is ongoing. Our findings explore the positive value of
historical and cultural traditions in a contemporary financial
economy, complementing formal financial systems, particu-
larly in emerging market economies.
The remainder of this paper is organized as follows: Section
2 describes the related literature and develops our hypotheses.
Section 3 describes the sample selection, variable construction,
and our empirical strategy. In section 4, we present the results
of our baseline empirical analysis and all extended robustness
tests. Section 5 shows the results of several further analyses.
Section 6 provides this paper's summary and concluding
remarks.
2. Literature review and development of our hypothesis
In a 2006 Presidential Address to the American Financial
Association, John Campbell coined the term “household
finance” to describe the field of research that analyzes how
households use financial instruments and markets to achieve
their objectives. Since then, household finance has attracted
substantial academic attention. Guiso and Sodini (2013) assert
that household finance is now a thriving, vibrant, and inde-
pendent field of inquiry.
Tufano (2009) demonstrates that the financial services and
products used by households make up a large portion of the
finance industry in all advanced countries. Households must
make a number of decisions that are not the theoretical or
empirical focus of asset pricing and corporate finance but are
central considerations in household finances and welfare. Many
households have limited access to credit, which impairs their
ability to transfer resources intertemporally and smooth con-
sumption over time. A growing body of literature on household
finance examines the facts about household assets and liabil-
ities, household risk preferences and beliefs, household port-
folio decisions, and household borrowing decisions
(Brunnermeir & Nagel, 2008; Calvet, Campbell, & Sodini,
2007; Chiuri & Jappelli, 2002; Fagereng, Gottlieb, & Guiso,
2011; Gollier, 2006; Guiso, Sapienza, & Zingales, 2008;
Piazzesi & Schneider, 2009; Yao & Zhang, 2005).
With respect to household finance in the context of China,
Gan et al. (2016) report the status and development of household
finance in rural China comprehensively and systematically.
Liao, Xiao, Zhang, and Zhou (2017) examine the correlation of
financial literacy and risky asset holding behavior by Chinese
households, revealing that consumers with higher levels of
financial literacy are more likely to hold risky assets than those
with lower levels. Cooper and Zhu (2018) use a lifecycle model
to investigate household finance in China, focusing on high
savings rates, low stock market participation rates, and low
shares of stocks in wealth. They conclude that, compared to the
US, the distinctive financial choices of households in China are
driven more by institutional factors, as well as by preference
variations. Gao (2019) finds that household investment decisions
are influenced by beliefs regarding gains. Song, Wu, and Zhou
(2020) demonstrate that inequality of opportunity raises both the
probability and the share of household risky asset investment.
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Niu, Wang, Li, and Zhou (2020) find that having more brothers
increases both the probability of stock market participation and
portfolio shares in stocks. Li, Wang, and Zhou (2021) charac-
terize the impact of entrepreneurship on household portfolio
choice and two underlying channels of the diversification effect
and the risk substitution effect.
Some previous literature brings the availability of household
credit into sharp focus. For instance, the ratio of loan to value
in Europe, the ratio of loans to income in the US, and the
conditional acceptance rates of loan applications all increased
in the 1990s. The securitization process and the development of
the subprime mortgage market in the US, innovations in the
consumer loan industry, and the massive liberalization of credit
and financial markets in many countries in continental Europe
encouraged considerable growth in household debt and access
to credit since then (Dynan & Kohn, 2007).
From a historical perspective, China has had fewer
formally organized means to bring capital access to the
public than Western countries. Despite having vast, orga-
nized marketplaces for goods and commodities, China had
less well-developed capital markets and financial institutions.
This “financial divergence” historically offers a promising
potential answer to the question: How could China have been
so far ahead of the rest of the world technologically and yet
have stumbled economically on the eve of the Industrial
Revolution? It also had a profound impact on Chinese private
economic activities (Goetzmann, 2016). Additionally,
Fukuyama (1995) emphasizes the importance of familism in
China's economic traditions. Scholars have argued that
kinship and collegiality in China have a cultural influence
analogous to that of law and individuality in the West
(Hamilton, 1996).
Although China achieved rapid economic growth in the past
few decades, financial repression and disparities in the flow of
capital remain systemic characteristics of its financial system
(Allen et al., 2013). Therefore, informal household financing is
bound to have an essential function in China's financial system
because of constraints on credit availability. Informal house-
hold finance can help to mitigate households' limited access to
credit resources under conditions characterized by high trans-
action costs, severe information asymmetry, and underdevel-
oped formal financial sectors.
Greif (1989, 1993) suggests that elements of traditional
culture, such as implicit contractual relations and coalitions,
can complement formal legal and contract enforcement and
address the problems of asymmetric information. Breuer,
Riesener, and Salzmann (2014) focus on the concept of na-
tional culture as a way of capturing and measuring information
about individual psychology. Culture is defined as customary
beliefs, social norms, and opinions regarding the values that
social groups transmit, relatively unchanged, from one gener-
ation to another. Guiso, Sapienza, and Zingales (2006) state
that national culture is reflected in individuals’ sense of what is
good, right, fair, and just. Restricting the potential channels of
cultural influence to beliefs and value judgments establishes an
approach for identifying a causal relationship from culture to
financial behaviors.
X. Hou, R. Yang and C. Liu
In the literature on behavioral household finance surveyed
by Williamson (2010) and Beshears, Choi, Laibson, and
Madrian (2018), culture, as a relatively stable determinant,
has a profound impact on economic and financial activities.
Guiso et al. (2006) reject a relationship of potential reverse
causality between culture and finance. People in a culture
might tend to rely more on financial instruments and funding
resources because of public opinion on the values embedded in
social organization forms, and reliable means of resource
accumulation and allocation are molded and profoundly
affected by a country's traditional culture. The significant im-
pacts of culture on corporate and individual financial decisions
are documented by Shao, Kwok, and Guehami (2008), Chui,
Titman, and Wei (2010), and Hilary and Hui (2009).
Karolyi (2016) sounds a note of particular caution about the
role of culture in guiding financial decisions because scholar-
ship on finance has paid relatively little attention to the role of
culture in financial decision-making compared to other busi-
ness disciplines and economics. Chen, Ma, and Sinclair (2021)
assert that, despite China's modernization efforts in the early
twentieth century, Confucianism continues to stifle financial
development by reducing demand for external finance. Finan-
cial development is path dependent. As Confucianism devel-
oped over more than two millennia, its effect on Chinese
people's economic way of life is likely to persist (Chen, Chen,
& He, 2019; Kung & Ma, 2014; Yuchtman, 2017).
Furthermore, Greif and Tabellini (2017) state that China and
the West have established different approaches for achieving
interpersonal cooperation, leading to distinct paths in institu-
tional and cultural development. Ma (2011) emphasizes that
the most fundamental economic institutions in the major
developing countries derived from long-established social
norms and traditions. Historically and actually, informal in-
stitutions, such as culture, have a significant influence on
constraining people's behaviors because of a higher degree of
official intervention. Traditional culture favors a reduction in
transaction costs and information asymmetry. Shiga (2002)
notes that the legal trial procedure in traditional Chinese so-
ciety closely approximates a process of didactic conciliation,
and the fulfillment of contracts is guaranteed by informal and
internal cultural norms. Additionally, Liang (1996) claims that
traditional rules and customs in China have binding force and
effectiveness based solely upon local social environments.
Chen et al. (2021) also assert that China's early adoption of
Confucianism as the state orthodoxy for structuring society in
favor of interpersonal risk sharing and resource pooling made
the country both uninterested in and unprepared for subsequent
external financial development. Thus, China, like other tradi-
tional societies, has long relied on household financing activ-
ities for risk sharing and resource pooling. Deng (1999) deeply
explores the connotation and influence of Confucian ideology
as a primary factor in the Chinese socioeconomic system.
Confucianism is commonly viewed as both the core of the
code of conduct for Chinese people in all walks of life and the
guidelines for the imperial government in ruling the country.
Confucian doctrine consists of the “way” (dao), the “will of
Heaven” (tian), “authoritative humanity” (ren), “harmonious
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social order” (li), and “moral integrity and virtue” (de). This
doctrine holds that its place in society is eternal, and Confu-
cian literati play an irreplaceable role; tian and dao became
principles that dictated Chinese everyday life; ren, the essence
of civilization, embodies people's dignity and value as human
beings and social harmony; a better interpretation of li is
“harmonious social order”; Confucian belief comprises the
view that a “harmonious social order” (li) and “sage-like
humanity” (ren) can be achieved through having moral
integrity and virtue (de).
As summarized by Deng (1999), if one assumes that
Confucian culture is a state philosophy, it is undeniable that,
beginning in the Western Han dynasty (202 B.C. - 8 A.D.), the
state philosophy helped to promote social order and stability by
defining justifiable methods, legitimating justice in human re-
lationships by defining duties, responsibilities, and rights
among individuals and groups, and accommodating and
compromising with conflicting interest groups. Thus Confucian
culture is assumed to have important effects on harmonizing
relationships, enhancing mutual trust, and compromise in terms
of the conflicting interests of borrowers and lenders—therefore,
reducing transaction costs and information asymmetry in
informal household financing activities.
Based on this discussion, our primary hypothesis, which we
test using several analyses, is as follows:
Hypothesis. Confucian culture has a significant positive
impact on informal household financing in China, given the
lack of well-developed financial services for households.
3. Data, variables, and empirical strategy
3.1. Data
The main data come from the 2013, 2015, and 2017 waves
of the China Household Financial Survey (CHFS). The CHFS
is conducted by the Survey and Research Center of China
Household Finance and is a nationwide survey of households
across China, excluding Tibet, Xinjiang, Inner Mongolia,
Hong Kong, Macao, and Taiwan.1 Comprehensive informa-
tion on household assets, liabilities, family members’ de-
mographic characteristics, employment status, and financial
circumstances are included in this dataset. Gan et al. (2016)
provide a comprehensive report on the development of
household finance in rural China. We draw our data from the
CHFS dataset, in which the respondent is the head of a
household (the member with the best knowledge about
household conditions) registered in a permanent rural place of
residence. In addition, the registered permanent residence of a
head of household is consistent with the habitation place.
Fig. 1 shows the ratio of private borrowers to total survey
1
Detailed information about the CHFS is available at http://www.chfsdata.
org. The CHFS has publicly released four waves of data. The first wave of
the CHFS (2011) is not used in this study because it did not include various
questions related to financial characteristics.
X. Hou, R. Yang and C. Liu
Fig. 1. The ratio of private borrowers to total survey respondents in each
county. Note: This figure shows the ratio of private borrowers to total survey
respondents in counties, with provincial capitals indicated to show geographic
location.
respondents in counties, with provincial capitals indicated to
show their geographic location. We find that this proportion
varies across counties over years.
The data regarding Confucian culture come from the Chi-
nese Research Data Services Platform (CNRDS). As a subset
of CNRDS, the Chinese Confucian Culture Database gathers
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information on Confucian culture at the county level. The data
on counties’ economic circumstances are collected from the
China Stock Market and Accounting Research database and
China Statistical Yearbook (county level) over the relevant
years. To remove the influence of outliers on our results, we
winsorized the data of continuous variables at an interval of 1
percent and 99 percent. Finally, all data for the value variables
were inflation adjusted to eliminate the impact of price
fluctuations.
3.2. Variable definition and summary statistics
We employ two measures of informal household financing
as dependent variables. The first measure, Privatefin, is a
dummy variable that equals 1 if the household is involved in
informal family borrowing. The second measure, Privatodebt,
is a ratio of private loan arrears to total household debt.
The main explanatory variable in our analysis is Confucian
culture, Confuciancul, which is represented by the logarithm of
the number of academies in a county during the Tang, Song,
Yuan, Ming, and Qing dynasties, Lgnacademy, and the density
of a county's academies, Densityaca, which is the number of
academies per 100 square kilometers.2 Fig. 2 shows the spread
of Confucian academies in the counties, demonstrating that
ancient academies are discretely distributed across the whole
country.
We also include a wide range of household socioeconomic
characteristics identified in existing literature as control vari-
ables to account for household heterogeneity (Campbell, 2006;
Christiansen, Joensen, & Rangvid, 2008; Cyganrehm &
Maeder, 2013; Guiso & Sodini, 2013; Li et al., 2021; Liao
et al., 2017; McCrary & Royer, 2011; Niu et al., 2020;
Renneboog & Spaenjers, 2012).
More specifically, we control for the individual character-
istics of the head of a household, such as the logarithm of the
age of the household head (Age), the education level (Edu),3 a
dummy variable for gender (Male), a dummy variable for
marital status (Married ), health status (Health), attitude toward
risk (Riskpre), and a dummy variable reflecting membership in
the Chinese Communist Party (Partymember). We also control
for several variables regarding household characteristics, such
as the household size (Size), the logarithm of total family
wealth (Lgwealth), the logarithm of family income (Lgincome),
a dummy variable to capture consanguinity in the same place
of residence (Relat), the status of the family social network
measured as a logarithm of cash gift payments made by a
household (Housenet), and a dummy variable for credit con-
straints (Creditconst). Year and county fixed effects are
controlled for to ensure that our main results are not affected by
2
In ancient China, academies were set up as educational institutions to
spread Confucian culture. Our empirical results do not suffer from reverse
causality because the main explanatory variables are constructed using data in
the Ming and Qing dynasties (hundreds of years ago), which predate measures
of informal household financing.
3
It is the logarithm of the years of schooling.
X. Hou, R. Yang and C. Liu
Fig. 2. The distribution of the number of ancient academies across the country. Note: This figure shows the number of ancient academies in the counties, which
demonstrates that ancient academies are discretely distributed across the whole country.
unobserved heterogeneity across regions and years. Table 1
presents detailed variable definitions.
Table 2 details the summary statistics of our main variables.
We also tested for multicollinearity between the explanatory and
the main control variables, including continuous variables and
dummy variables, to guard against the impacts of highly mul-
ticollinear regressors on our parameter estimates. The resulting
value of condition number and the mean variance inflation
factors all imply that high multicollinearity is not found. Table 3
presents the correlation coefficients among our main variables,
providing a preliminary confirmation of our argument and
constructive clues to our subsequent regression analysis.
3.3. Econometric specification
Pooled data on the three waves of the CHFS are used for our
baseline regression models. Following Hellevik (2009), Chatla
and Shmueli (2017), Niu et al. (2020), and Li et al. (2021), we
employ a linear probability model (LPM) to estimate the
4
Greene (2017) and Chatla and Shmueli (2017) document that LPMs are
more attractive and appropriate for investigating a causal relationship than
obtaining valid predicted probabilities.
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impact of Confucian culture on households’ informal financing
participation and ordinary least squares (OLS) regressions to
investigate its effect on the ratio of private loan arrears to total
household debt. The general baseline model is as follows4:
Houseinfinict = α + β⋅Confucianculc + δ′ Xict + τt + λc + εict
(1)
where Houseinfinict is Privatefinict and Privatodebtict, respec-
tively, to indicate the informal financing status of household i
in county c at time t. Confucianculc is represented by Lgna-
cademyc and Densityacac. Xict represents a group of control
variables. τt is the year fixed effect, λc denotes the county
dummies, and εict is the error term. The OLS method is
employed to estimate Equation (1), and standard errors are
clustered at the county level. Additionally, probit models are
used as a robustness check on the empirical relationship be-
tween Confucianculc and Privatefinict; we also employ a Tobit
model to examine the robust impact of Confucian culture on
Privatodebtict, which is bounded between 0 and 1.
X. Hou, R. Yang and C. Liu _
Borsa Istanbul Review 22-5 (2022) 1005–1019

Table 1 Table 2
Variable definitions. Summary statistics for the main variables.
Variable Definition Variable N Mean Std. Dev. Minimum Maximum
Privatefin Dummy variable that equals 1 if the household is Privatefin 39,900 0.241 0.427 0.000 1.000
involved in informal family borrowing and 0 Privatodebt 13,136 0.505 0.465 0.000 1.000
otherwise. Lgnacademy 39,900 0.534 0.487 0.000 1.908
Privatodebt Ratio of private loan arrears to total household debt. Densityaca 39,900 0.332 0.825 0.000 19.104
Lgnacademy Logarithm of the number of academies in a county Age 39,896 47.787 21.182 14.000 77.000
during the Tang, Song, Yuan, Ming, and Qing Edu 28,721 0.908 0.127 0.778 1.342
dynasties (618 A.D. - 1912 A.D.). Male 39,899 0.509 0.499 0.000 1.000
Densityaca Number of academies per 100 square kilometers. Married 34,386 0.827 0.378 0.000 1.000
Lgage Logarithm of the age of household head. Health 39,865 0.775 0.418 0.000 1.000
Edu Logarithm of the years of schooling. Riskpre 13,769 1.617 0.659 0.000 2.000
Male Dummy variable that equals 1 if the head of a Partymember 19,160 0.079 0.270 0.000 1.000
household is male and 0 otherwise. Size 39,900 0.557 0.216 0.000 1.279
Married Dummy variable that equals 1 if the head of a Lgwealth 39,875 1.212 0.730 −4.000 3.985
household is married and 0 otherwise. Lgincome 6708 0.272 0.410 −3.523 1.857
Health Dummy variable that equals 1 if the member of a Relat 15,904 0.884 0.321 0.000 1.000
family is healthy and 0 otherwise. Housenet 26,452 −0.732 0.535 −5.000 1.653
Riskpre The attitude of the household head toward risk, Creditconst 36,443 0.106 0.308 0.000 1.000
which equals 0, 1, or 2 if the risk attitude is risk- Note: Std. Dev. is standard deviation.
preference, risk-neutral, or risk-averse, respectively.
Partymember Dummy variable that equals 1 if the household head
is a member of the Chinese Communist Party and 0 Table 3
otherwise. Correlation coefficients of the main variables.
Size Logarithm of the number of members of a family.
Lgwealth Logarithm of total family wealth. Lgnacademy Densityaca
Lgincome Logarithm of family income. Privatefin 0.021*** 0.009*
Relat Dummy variable that equals 1 if the household head Privatodebt 0.041*** 0.047***
has consanguinity in the same place of residence
Note: *, **, and *** denote statistical significance at 10%, 5%, and 1% levels,
and 0 otherwise.
respectively.
Housenet Logarithm of cash gift payments made by a
household.
Creditconst Dummy variable that equals 1 if the household's Now that contemporary informal household financing has
application for loans is not submitted or is rejected been determined not to affect Confucian culture, represented
by banks and 0 otherwise. by the variables that formed historically, no further discussion
is needed about reverse causality. Moreover, in the light of the
geographic divisions, as well as strong information asymme-
To address the potential endogeneity problem, we imple- try and the high risk of private lending, the spatial correlation
ment sensitivity analysis of the omitted variables, as described and spillover of informal household financing are not a
in Cinelli, Ferwerda, and Hazlett (2020). Additionally, several concern.
potential interference factors, such as financial literacy In addition, we further address potential endogeneity
(Financeknown),5 the growth rate of the gross domestic prod- problems following the matched sample analysis proposed by
uct (GDP) at the county level (Countygrowth), a logarithm of Francis, Lennox, and Wang (2012). We then employ placebo
the number of Confucian temples (Lgnconfutemp) and density tests, in which we randomly assign (with replacement)
(Densityctemple) of Confucian temples in a county,6 and a Confucianculc to each household in a county at time t based
dummy variable that equals 1 if a region has been the seat of a on the sample distribution of our explanatory variables and
local government at the province level since the Tang dynasty, rerun the baseline regressions, repeating them 500 times. The
and 0 otherwise (Admincenter)7 are controlled for to address average coefficient for the main explanatory variables over
concerns regarding alternative hypotheses and further confirm the 500 repetitions and the corresponding one-sample t-test
our empirical results. results, in which the null hypothesis is that the mean coef-
ficient for our main explanatory variable equals 0, are
reported.
Additionally, we use instrumental variable regressions to
further alleviate concerns regarding the endogeneity of our
5
Financeknown equals 1 if a household head received financial training, and
0 otherwise. explanatory variables. Finally, in a section on further analysis,
6
We controlled for these variables to factor out the influence of the power of we then address possible endogeneity issues driven by unob-
county clan organizations, represented by Confucian temples, thereby capturing servable variables by investigating cross-sectional variations in
the effect of Confucian culture more precisely. the relationship between Confucian culture and informal
7
Admincenter is controlled for because a place that is the seat of a local
household financing. Following Allen et al. (2019), we perform
government at the province level historically obtained more support from the
central government to promote Confucian culture, which reflects the influence a series of heterogeneity analyses to examine variations in
of the intervention of the central government, rather than Confucian culture. cross-sectional pattern based on several dimensions, including

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Borsa Istanbul Review 22-5 (2022) 1005–1019

the development of a county's digitally inclusive finance, a
geographic variable indicating the western region of China, and
the county business environment. If our empirical results hold,
we should find the expected variations in the main effects with
changes in the external environment.
4. Empirical results
4.1. Baseline results
Table 4 presents the results of our baseline regressions. In our
sample dataset, 24.1 percent of rural households participate in
informal financing activities. On average, the ratio of private
loan arrears to total household debt is 50.5 percent. In Panel A of
Table 4, Column 1 shows that Confucian culture is positively
related to both a household's likelihood of involvement in
informal financing and the ratio of private loan arrears to total
household debt, which holds when the attitude of the household
head toward risk and the political status variable are controlled
for in Column 2. Moreover, after controlling for all individual
characteristics, household features, year dummies, and county
dummies in Column 3, the significant coefficient estimates of
Lgnacademy are 0.395 and 0.652 for the dependent variables
Privatefin and Privatodebt, respectively. In Panel B, we find the
same pattern when the explanatory variable is represented by the
density of a county's academies. After controlling for all indi-
vidual characteristics, household characteristics, year dummies,
and county dummies, the significant coefficient estimates of
Densityaca are 0.096 and 0.325 for the dependent variables
Privatefin and Privatodebt, respectively.
Table 4 provides strong empirical evidence that Confucian
culture has a significantly positive impact on informal

Table 4
Results of baseline regressions.
Panel A Privatefin Privatodebt
(1) (2) (3) (1) (2) (3)
Lgnacademy 0.097*** (0.009) 0.122*** (0.016) 0.395** (0.160) 0.101*** (0.018) 0.443*** (0.154) 0.652*** (0.198)
lgage −0.375*** (0.024) −0.571*** (0.072) −0.350 (0.323) −0.024 (0.039) −0.369 (0.299) −0.362 (0.907)
Edu −0.026 (0.025) −0.019 (0.048) 0.015 (0.171) −0.176*** (0.049) −0.301*** (0.074) −0.182 (0.443)
Male 0.005 (0.003) 0.022*** (0.005) 0.031 (0.031) 0.007 (0.006) 0.028*** (0.009) 0.026 (0.085)
Married 0.029*** (0.007) 0.066*** (0.022) 0.091 (0.102) −0.055*** (0.016) −0.006 (0.034) 0.247 (0.319)
Health −0.055*** (0.007) −0.073*** (0.012) −0.131* (0.076) 0.009 (0.014) −0.046** (0.019) −0.158 (0.163)
Riskpre −0.023** (0.009) 0.005 (0.032) 0.014 (0.013) −0.064 (0.077)
Partymember −0.037** (0.018) −0.052 (0.064) −0.087*** (0.033) −0.140 (0.194)
Size −0.078 (0.153) −0.499 (0.384)
Lgwealth 0.039 (0.039) −0.086 (0.125)
Lgincome −0.010 (0.055) 0.016 (0.127)
Relat 0.012 (0.099) −0.046 (0.185)
Housenet 0.033 (0.043) −0.033 (0.125)
Creditconst 0.118* (0.070) −0.111 (0.145)
County dummies Yes Yes Yes Yes Yes Yes
Year dummies Yes Yes Yes Yes Yes Yes
N 28,007 9497 908 9175 3372 279
R-squared 0.197 0.230 0.525 0.280 0.357 0.753
Panel B
Densityaca 0.049*** (0.001) 0.039*** (0.002) 0.096** (0.039) 0.034*** (0.002) 0.006** (0.003) 0.325*** (0.087)
lgage −0.375*** (0.024) −0.571*** (0.072) −0.350 (0.323) −0.024 (0.039) 0.155 (0.104) −0.362 (0.907)
Edu −0.026 (0.025) −0.020 (0.048) 0.015 (0.171) −0.176*** (0.049) −0.345*** (0.076) −0.182 (0.443)
Male 0.005 (0.003) 0.022*** (0.005) 0.031 (0.031) 0.007 (0.006) 0.034*** (0.009) 0.026 (0.085)
Married 0.029*** (0.007) 0.066*** (0.022) 0.091 (0.102) −0.055*** (0.016) 0.007 (0.037) 0.247 (0.319)
Health −0.055*** (0.007) −0.073*** (0.012) −0.131* (0.076) 0.009 (0.014) −0.045** (0.021) −0.158 (0.163)
Riskpre −0.023** (0.009) 0.005 (0.032) 0.015 (0.013) −0.064 (0.077)
Partymember −0.037** (0.018) −0.052 (0.064) −0.077** (0.032) −0.140 (0.194)
Size −0.078 (0.153) −0.499 (0.384)
Lgwealth 0.039 (0.039) −0.086 (0.125)
Lgincome −0.010 (0.055) 0.016 (0.127)
Relat 0.012 (0.099) −0.046 (0.185)
Housenet 0.033 (0.043) −0.033 (0.125)
Creditconst 0.118* (0.071) −0.111 (0.146)
County dummies Yes Yes Yes Yes Yes Yes
Year dummies Yes Yes Yes Yes Yes Yes
N 28,007 9497 908 9175 3372 279
R-squared 0.197 0.230 0.525 0.280 0.357 0.753
Note: The first dependent variable is involvement in informal household financing, Privatefin. The second dependent variable is the ratio of private loan arrears to
total household debt, Privatodebt. In Panel A, the explanatory variable is Lgnacademy. In Panel B, it is the density of a county's academies, Densityaca. *, **, and
*** denote statistical significance at the 10%, 5%, and 1% levels, respectively. Corresponding standard errors clustered at the county level are reported in
parentheses.

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X. Hou, R. Yang and C. Liu
household financing. Additionally, although Hünermund and
Louw (2020) document that there is no need to consider the
estimated coefficients of control variables in multivariate re-
gressions because control variables cannot provide structural
explanations, we still find that the coefficient estimates of our
control variables are mainly consistent with the directions
identified in previous studies, such as Niu et al. (2020) and Li
et al. (2021).
The sensitivity analysis to omitted variables in Table 5,
proposed by Cinelli et al. (2020), shows that when the
dependent variable is Privatefin, it needs almost twice the
explanatory power of the potentially omitted variables
compared withRelat, Housenet, and Creditconst to influence
our baseline regression results. When the dependent variable is
Privatodebt, based on the same benchmark variables, it needs
almost four times the explanatory power to influence our
baseline regression results if the explanatory variable is
Lgnacademy and the six times the explanatory power if the
explanatory variable is Densityaca. Therefore, our results are
robust because Relat, Housenet, and Creditconst, reflecting
family networks and financing constraints, are relatively sig-
nificant influential factors identified in previous literature.
4.2. Results for potential alternative explanations
Several potential interference factors are included, such as
financial literacy (Financeknown), the GDP growth rate at the
county level (Countygrowth), the logarithm of the number
(Lgnconfutemp) and density (Densityctemple) of Confucian
temples in a county in the Ming and Qing dynasties, and a
dummy variable for the seat of a local government at the
province level since the Tang dynasty (Admincenter). According
to Guiso and Sodini (2013), Gan et al. (2016), and Liao et al.
(2017), financial literacy and local GDP growth often boost
household finance. Additionally, a county's clan organizations
and social power, represented by Confucian temples, can pro-
mote informal household financing8; thus we include Lgncon-
futemp and Densityctemple to observe their potential influence.
Finally, when a place that is the seat of a local government at the
province level historically obtained more support from the
central government to promote Confucian culture, which reflects
the influence of the intervention of the central government,
rather than Confucian culture, the impact of Admincenter on
informal household financing should also be eliminated.
In Table 6, the potential alternative explanations do not
abate the significantly positive impacts of our main explanatory
variables on informal household financing. The coefficient
estimates of Lgnacademy and Densityaca are all significantly
positive, regardless of whether the dependent variable is Pri-
vatefin or Privatodebt. In addition, the number of observations
for a few regressions is relatively small because of the missing
values of some interference factors in the context of our defined
research sample. Nevertheless, according to the existing
8
The construction of Confucian temples was mostly sponsored and orga-
nized by big local clans.
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Borsa Istanbul Review 22-5 (2022) 1005–1019
Table 5
Results of sensitivity analysis to omitted variables.
Privatefin Privatodebt
Lgnacademy 2.000 4.000
Densityaca 2.000 6.000
Note: The benchmark variables used in the analysis of sensitivity to omitted
variables, compared to potentially unobserved confounders, are Relat, House-
net, and Creditconst. Our main control variables are also included.
literature (e.g., Acemoglu & Restrepo, 2022), our results
remain conceivable, especially as the robustness tests for our
primary empirical results.
4.3. Further robustness checks and addressing
endogeneity
4.3.1. Alternative regression specifications
A probit model is employed as a robustness check in the
estimation of the relationship between Confucian culture and
households’ participation in informal financing. We also use a
Tobit model to investigate the impact of Confucian culture on
the proportion of informal household financing. Table 7 pre-
sents the results of these robustness tests, showing that the
relationship identified between Confucian culture and informal
household financing still holds when the alternative model
specifications are used.
4.3.2. Regression results of matched sample and placebo
tests
We further address potential endogeneity problems using
the matched sample analysis method proposed by Francis
et al. (2012). We perform matching based on the propensity
scores of our main explanatory variables. In the first stage,
following Al-Thaqeb and Algharabali (2019), we model the
likelihood that a household is highly influenced by traditional
culture in a county as a function of variables for all charac-
teristics (Guiso & Sodini, 2013). Households are highly
influenced by Confucian culture when the corresponding
values of Confucian culture variables are above the upper
quartile. We then conduct radius matching, pairing highly
influenced households with minimally influenced households
that have the closest propensity scores, in which the absolute
difference between the two households’ propensity scores is
no greater than 0.01. The LPM on the propensity score
matched sample under our specification of Equation (1) is re-
estimated. Table 8 reports the results, which are consistent
with our hypothesis.
We next employ placebo tests, in which we randomly assign
(with replacement) Confucianculc to each household in a
county at time t based on the sample distribution of our
explanatory variables and rerun the baseline regressions,
repeating the exercise 500 times. The average coefficient for
the main explanatory variables over the 500 repetitions and
corresponding one-sample t-test results, in which the null hy-
pothesis is that the mean coefficient of our main explanatory
variable equals 0, are reported in Table 9.
 X. Hou, R. Yang and C. Liu
Table 6
Results for potential alternative explanations.
Panel A Privatefin Privatodebt
(1) (2) (3) (4) (1) (2) (3) (4)
Lgnacademy 0.693*** (0.126) 0.554* (0.293) 0.395** (0.160) 0.395** (0.160) 0.635*** (0.242) 0.131* (0.076) 0.652*** (0.198) 0.410* (0.233)
Financeknown 0.097 (0.264) −0.219 (0.501)
Countygrowth 0.004 (0.009) −0.007 (0.045)
Lgnconfutemp 1.219** (0.557) 0.647 (0.811)
Admincenter −0.034 (0.076) −0.413*** (0.151)
All control variables Yes Yes Yes Yes Yes Yes Yes
County dummies Yes Yes Yes Yes Yes Yes Yes
Year dummies Yes Yes Yes Yes Yes Yes Yes
N 423 663 908 908 154 211 279 279
R-squared 0.504 0.556 0.525 0.525 0.729 0.790 0.753 0.753
1014

Panel B
Densityaca 0.431*** (0.122) 0.214** (0.083) 0.383*** (0.101) 0.096** (0.039) 0.124** (0.053) 0.453** (0.225) 0.477* (0.292) 0.325*** (0.087)
Financeknown 0.097 (0.264) −0.219 (0.501)
Countygrowth 0.004 (0.009) −0.007 (0.045)
Densityctemple −0.110 (0.118) 0.108 (0.301)
Admincenter 0.587** (0.249) −1.279*** (0.461)
All control variables Yes Yes Yes Yes Yes Yes Yes Yes
County dummies Yes Yes Yes Yes Yes Yes Yes Yes
Year dummies Yes Yes Yes Yes Yes Yes Yes Yes
N 423 663 676 908 154 211 213 279
R-squared 0.504 0.556 0.520 0.525 0.729 0.790 0.759 0.753

Borsa Istanbul
Note: The first dependent variable is informal household financing involvement, Privatefin, defined as a dummy variable that equals 1 if the household is involved in informal family borrowing, and 0 otherwise. The
second dependent variable is the ratio of private loan arrears to total household debt, Privatodebt. In Panel A, the explanatory variable, Lgnacademy, is the logarithm of the number of academies in a county during

_
the Tang, Song, Yuan, Ming, and Qing dynasties. In Panel B, it is the density of a county's academies, Densityaca. *, **, and *** denote statistical significance at the 10%, 5%, and 1% levels, respectively.
Corresponding standard errors clustered at the county level are reported in parentheses.

Review 22-5 (2022) 1005–1019

X. Hou, R. Yang and C. Liu _
Borsa Istanbul Review 22-5 (2022) 1005–1019

Table 7 Table 9
Results of Probit and Tobit regressions. Placebo test results.
Privatefin Privatodebt Dependent variable Privatefin Privatodebt
Panel A Mean coefficient for 0.000005 (0.001) −0.004 (0.003)
Lgnacademy 1.626***(0.279) 0.504***(0.152) Lgnacademy
All control variables Yes Yes Mean coefficient for −0.0003 (0.0009) −0.001 (0.002)
County dummies Yes Yes Densityaca
Year dummies Yes Yes N 500 500
N 552 279 Note: This table presents the summary statistics of the regression estimates for
Pseudo R-squared 0.302 0.192 the baseline model with the full set of control variables when we randomly
Panel B assigned Confucianculc to each household based on the sample distribution of
Densityaca 2.268***(0.389) 1.132***(0.110) explanatory variables. For each replication, we recorded the estimated coeffi-
All control variables Yes Yes cient and associated p-value. We repeat this procedure 500 times. The mean
County dummies Yes Yes coefficient estimates for the main explanatory variables across the 500 repli-
Year dummies Yes Yes cations are presented. Corresponding standard errors of one-sample t tests are
N 552 279 displayed in parentheses where the null hypothesis is that the mean coefficient
Pseudo R-squared 0.302 0.205 for our main explanatory variable equals 0. *, **, and *** indicate significance
Note: The first dependent variable is informal household financing involve- at the 10%, 5%, and 1% levels, respectively.
ment, Privatefin, defined as a dummy variable that equals 1 if the household is
involved in informal family borrowing, and 0 otherwise. The second dependent
variable is the ratio of private loan arrears to total household debt, Privatodebt. Privatefin or Privatodebt, the percentage of significantly pos-
In Panel A, the explanatory variable, Lgnacademy, is the logarithm of the itive coefficient estimates at the 5 percent level is less than 2
number of academies in a county during the Tang, Song, Yuan, Ming, and Qing percent. This evidence strongly suggests that the measures of
dynasties. In Panel B, it is the density of a county's academies, Densityaca. A
Probit model is used for the first dependent variable; a Tobit model is employed
Confucian culture are positively associated with informal
for the second dependent variable. *, **, and *** denote statistical significance household financing, as opposed to random noise.
at the 10%, 5%, and 1% levels, respectively. Corresponding clustered standard
errors are reported in parentheses. 4.3.3. Instrumental variable estimation results
Table 10 presents the estimation results using instrumental
variables (IV) as our explanatory variables and fitting the
As demonstrated, we cannot reject that the means of esti- baseline models with the standard errors clustered at the county
mated coefficients for our main explanatory variables are not level. A logarithm of the number of jinshi (a successful candi-
different than 0. In addition, all estimated coefficients are date in the highest imperial examinations) and the density of
roughly equally split between positive and negative. Moreover, jinshi in the Ming and Qing dynasties in the prefecture-level
in all cases, regardless of whether the dependent variable is cities closest to various counties, are employed as the IVs for
Lgnacademy and Densityaca, respectively.9 We adjust the de-
Table 8 grees of freedom and report small-sample statistics. These
Results of matched sample analysis. findings once again suggest that our empirical results are truly
Privatefin Privatodebt robust after the primary endogeneity concerns are addressed.
Panel A
Lgnacademy 0.400** (0.163) 0.658*** (0.206) 5. Further analysis
All control variables Yes Yes
County dummies Yes Yes Finally, following Allen et al. (2019), we use a series of
Year dummies Yes Yes
N 898 276
heterogeneity analyses to examine variation in cross-sectional
R-squared 0.522 0.751 patterns based on several dimensions, such as the development
Panel B of digitally inclusive finance in a county, a geographic variable
Densityaca 0.098** (0.040) 0.331*** (0.094) indicating a location in western China, and the county's business
All control variables Yes Yes
environment. This evidence further supports our main findings.
County dummies Yes Yes
Year dummies Yes Yes
N 898 276 5.1. Augmented mechanism from digitally inclusive
Pseudo R-squared 0.522 0.751 finance in a county
Note: The first dependent variable is involvement in informal household
financing, Privatefin, defined as a dummy variable that equals 1 if the house- We further investigate whether a higher degree of devel-
hold is involved in informal family borrowing, and 0 otherwise. The second opment of digitally inclusive finance promotes informal
dependent variable is the ratio of private loan arrears to total household debt,
household financing activities at the county level. Financial
Privatodebt. In panel A, the explanatory variable, Lgnacademy, is the logarithm
of the number of academies in a county during the Tang, Song, Yuan, Ming, inclusion is defined as a financial system that effectively and
and Qing dynasties. In panel B, it is the density of a county's academies, comprehensively provides services to all groups in society. Its
Densityaca. The matched sample analyses are employed. *, **, and *** denote
statistical significance at the 10%, 5%, and 1% levels, respectively. Corre-
9
sponding standard errors clustered at the county level are reported in They are correlated with our explanatory variables but cannot be used to
parentheses. explain informal household financing at the county level directly.

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Table 10
The impact of Confucian culture on informal household financing based on IV estimators.
Privatefin Privatodebt Privatefin Privatodebt
Lgnacademy 0.395**(0.181) 0.652***(0.158) Densityaca 0.096**(0.047) 0.032***(0.007)
All control variables Yes Yes All control variables Yes Yes
County dummies Yes Yes County dummies Yes Yes
Year dummies Yes Yes Year dummies Yes Yes
N 908 279 N 908 279
R-squared 0.525 0.753 R-squared 0.525 0.753
Note: The first dependent variable is informal household financing involvement, Privatefin, defined as a dummy variable that equals 1 if the household is involved in
informal family borrowing, and 0 otherwise. The second dependent variable is the ratio of private loan arrears to total household debt, Privatodebt. Explanatory
variables are the logarithm of the number of academies in a county, Lgnacademy, during the Tang, Song, Yuan, Ming, and Qing dynasties and the density of a
county's academies, Densityaca, respectively. Our estimations pass the tests of underidentification and weak identification. The p-value of F tests are all less than
0.01. *, **, and *** indicate significance at the 10%, 5%, and 1% levels, respectively. Corresponding robust standard errors are reported in parentheses.

Table 11
Augmented mechanism analysis.
Privatefin Privatodebt Privatefin Privatodebt
Diglgnacademy 0.316*(0.180) 0.602**(0.303) Digdensityaca 0.592** (0.285) 1.142** (0.563)
Explanatory and all control Yes Yes Explanatory and all control Yes Yes
variables variables
County dummies Yes Yes County dummies Yes Yes
Year dummies Yes Yes Year dummies Yes Yes
N 908 279 N 908 279
R-squared 0.527 0.761 R-squared 0.527 0.759
Note: The first dependent variable is informal household financing involvement, Privatefin, defined as a dummy variable that equals 1 if the household is involved in
informal family borrowing, and 0 otherwise. The second dependent variable is the ratio of private loan arrears to total household debt, Privatodebt. Explanatory
variables include Lgnacademy, the logarithm of the number of academies in a county during the Tang, Song, Yuan, Ming, and Qing dynasties, and the density of a
county's academies, Densityaca, respectively. The Diglgnacademy is an interaction term of Digitalin and Lgnacademy; the Digdensityaca is an interaction term of
Digitalin and Densityaca. *, **, and *** indicate significance at the 10%, 5%, and 1% levels, respectively. Corresponding standard errors clustered at the county
level are reported in parentheses.

original intention was to emphasize continuous improvement in
financial infrastructure to increase the availability of financial
services and provide convenient financial services at lower cost
to all people, particularly those in underdeveloped areas and
those who have lower income. The new digital financial
businesses, represented by financial services that rely on
internet technology companies through information technology
and product innovation, reduce the cost of financial services
and expands the ability to engage in financial activities.
Therefore, new digital financial businesses are the primary
source of inclusive finance. Even in the absence of physical
facilities, such as bank branches and ATMs, customers in some
areas can still obtain needed financial services with electronic
devices, such as computers and mobile phones.
The development of digitally inclusive finance might
reduce households’ reliance on formal financial institutions
and instruments and increase consensus about integrity and
compliance by reducing information asymmetry and trans-
action costs, extending the positive influence of traditional
culture on informal financing activities. This mechanism im-
plies that the positive relationship between Confucian culture
and informal household financing should be significantly
strengthened in regions with higher development of digitally
inclusive finance.
To test our conjecture, we employ the index of digitally
inclusive finance compiled by the Institute of Digital Finance at
Peking University for the development of digitally inclusive
finance of each county in the corresponding years. This index
has been widely used, and high values of the index suggest a
higher degree of development of rural digitally inclusive
finance.10 We define a dummy variable (Digitalin) that equals 1
if a county's digitally inclusive finance development level is
higher than the sample median of the index of digitally inclu-
sive finance, and 0 otherwise. Then, we add Digitalin, an
interaction term of Digitalin, and an explanatory variable to our
baseline model to test our hypothesis.11
We report the results in Table 11, showing that the signif-
icantly positive impact of Confucian culture on informal
household financing is stronger when the degree of digitally
inclusive finance development in a county is higher. The esti-
mated coefficients of Diglgnacademy and Digdensityaca
remain significantly positive. The empirical result supports our
contention that a higher degree of digitally inclusive finance
development can strengthen the positive association between
10
The Peking University Digital Financial Inclusion Index of China is con-
structed from the perspective of the breadth of digital finance coverage, the
depth of digital finance use, and the degree of digitization of inclusive finance.
This comprehensive index consists of three dimensions and 33 specific
indicators.
11
The approach based on an interaction term, rather than seemingly unrelated
estimation based on the group samples, is employed here because the number of
households in the group with a low level of digitally inclusive finance is not large
enough for using a seemingly unrelated estimation based on the sample groups.

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Table 12
Geographic heterogeneity analysis based on seemingly unrelated estimations.
Privatefin Privatodebt Privatefin Privatodebt
Lgnacademy for western −0.008 (0.150) −0.652**(0.302) Densityaca for Western China −0.241 (0.509) −0.021 (0.301)
China
Lgnacademy for other regions 0.437***(0.144) 0.722***(0.135) Densityaca for other regions 0.092*** (0.035) 0.093** (0.040)
All control variables Yes Yes All control variables Yes Yes
County dummies Yes Yes County dummies Yes Yes
Year dummies Yes Yes Year dummies Yes Yes
N 908 279 N 908 279
Note: The first dependent variable is informal household financing involvement, Privatefin, defined as a dummy variable that equals 1 if the household is involved in
informal family borrowing, and 0 otherwise. The second dependent variable is the ratio of private loan arrears to total household debt, Privatodebt. Explanatory
variables are the logarithm of the number of academies in a county, Lgnacademy, during the Tang, Song, Yuan, Ming, and Qing dynasties and the density of
academies in a county, Densityaca, respectively. *, **, and *** indicate significance at the 10%, 5%, and 1% levels, respectively. Standard errors are clustered at the
county level in the seemingly unrelated estimations.

Table 13
Business environment heterogeneity analysis based on seemingly unrelated estimations.
Privatefin Privatodebt Privatefin Privatodebt
Lgnacademy for high-level 0.424*** (0.136) 0.612*** (0.133) Densityaca for high-level 0.096*** (0.033) 0.110*** (0.042)
business environment business environment
Lgnacademy for low-level 0.228 (0.425) 0.274 (0.635) Densityaca for low-level −0.018 (0.198) 0.240 (0.173)
business environment business environment
All control variables Yes Yes All control variables Yes Yes
County dummies Yes Yes County dummies Yes Yes
Year dummies Yes Yes Year dummies Yes Yes
N 908 279 908 279
Note: The first dependent variable is informal household financing involvement, Privatefin, defined as a dummy variable that equals 1 if the household is involved in
informal family borrowing, and 0 otherwise. The second dependent variable is the ratio of private loan arrears to total household debt, Privatodebt. Explanatory
variables are the logarithm of the number of academies in a county, Lgnacademy, during the Tang, Song, Yuan, Ming, and Qing dynasties and the density of a
county's academies, Densityaca, respectively. *, **, and *** indicate significance at the 10%, 5%, and 1% levels, respectively. Standard errors are clustered at the
county level in the seemingly unrelated estimations.

Confucian culture and informal household financing, which
further confirms our main hypothesis.
5.2. Geographic heterogeneity analysis
We preliminarily confirm the significantly positive impact
of Confucian culture on informal household financing, and this
impact is expected to be stronger in regions where Chinese
traditional culture is well preserved. Deng (1999) and Ma
(2008) assert that cultural heritage and customs are preserved
to a greater degree in southern China than in western China,
which historically experienced more frequent wars and in-
vasions.12 If we combine this with official contemporary
geographic divisions, we conjecture that the positive relation-
ship between Confucian culture and informal household
financing might not be as strong in western China as in other
regions.
According to Equation (1), and employing a seemingly
unrelated estimation, we test our assumption. Table 12 reports
the results, showing that informal household financing, whether
represented by Privatefin or Privatodebt, is significantly posi-
tively affected by Confuciancul, primarily among households
other than those in western China. The coefficient estimates of
our explanatory variables for various groups significantly
differ. The Breusch–Pagan independence tests for the error
terms of various estimation equations confirm the inference
efficiency of the seemingly unrelated estimations. Additionally,
the χ2 test results for the differences in coefficient estimates
reveal that these differences are all significant, at a level of at
least 10 percent.
5.3. Business environment heterogeneity analysis
Formal institutions, consisting of laws, rules, and regula-
tions, are closely related to the local business environment. A
better local business environment effectively augments the
influence of formal institutions over informal institutions, such
as traditional culture. In light of their mutual reinforcement
(Ménard & Shirley, 2008), we expect the impact of Confucian
culture on informal household financing to be more pro-
nounced in counties with a better business environment.13
Table 13 presents the results of our business environment
heterogeneity analysis.

12 13
The western region includes Chongqing, Gansu, Guangxi, Guizhou, Inner It is hard to imagine that traditional culture could work alone, without basic
Mongolia, Ningxia, Qinghai, Shaanxi, Sichuan, Tibet, Xinjiang, and Yunnan. assurances from informal institutions.

1017
X. Hou, R. Yang and C. Liu
The local business environment is proxied by a logarithm of
the amount of foreign capital investment in each prefecture. We
then divide the counties in our sample into two groups, high-
and low-level business environments, using a split point of the
sample median of the business environment variable. The
Breusch–Pagan independence tests for the error terms of
various estimation equations confirm the inference efficiency of
the seemingly unrelated estimations, supporting our assump-
tions.14 The impacts of Confucian culture on informal house-
hold financing are far more pronounced in regions with a better
business environment.
5.4. Additional robustness checks
We conduct several additional robustness tests that are not
presented here in detail for the sake of brevity, but they are
available upon request. First, we further incorporate the expec-
tations of a household head about stock market quotations into our
baseline regression as a control variable. The expectations about
stock market quotations reflect a judgment about recent economic
trends that could affect household borrowing decisions. The
empirical results are highly accordant, leading to the same con-
clusions as our earlier analysis. Second, our conclusions are
robust to the inclusion of a dummy variable for whether a
household is engaged in business activities as an additional
control variable to capture changes in demand for financing.
Finally, the variable for fiscal expenditure per capita in a county is
also controlled for. This variable partly reflects the power of
government intervention because data regarding the proportion of
the state-owned economy at the county level is unobtainable.
These additional robustness checks all support our main results.
6. Conclusion
China, a large country with a long history and cultural tra-
ditions, has achieved rapid economic growth in the past few
decades. The informal alternative financial sector in China has
played a significant role in supporting the growth of the most
dynamic sector in the economy. This informal sector offers
more sources of financing for the private sector and house-
holds, raising the efficiency of resource allocation in the entire
economy. The study of household finance is a thriving, vibrant,
and separate field, and a growing body of literature investigates
the determinants of household financing activities.
This study examines the impact of Confucian culture on
informal household financing in China by counties. We
demonstrate that Confucian culture has a significant and posi-
tive impact on informal household financing activities, and a
higher degree of digitally inclusive finance development can
strengthen the positive relation between Confucian culture and
informal household financing. This positive association appears
to be stronger in regions where Chinese traditional culture is
well preserved and is more pronounced in regions with better
14
The χ2 test results are also consistent with our expectation.
1018
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Borsa Istanbul Review 22-5 (2022) 1005–1019
business environments. Our empirical results are confirmed
through several robustness checks.
Our findings have meaningful policy implications. In the
process of accelerated work on the modernization trans-
formation, maintaining cultural traditions in China, a large
emerging economy characterized by an underdeveloped
financial system, might significantly reduce transaction costs
and information asymmetry and promote further development
of informal finance to reduce the gap in the supply and demand
for financial services and raise allocative efficiency in financial
resources. Finally, the impact of traditional culture documented
in this paper might not be limited to China. It would be
promising and interesting to investigate whether culturally
based factors in other countries, in a broad sense, also have an
impact on informal household financial activities.
Declaration of competing interest
None.
Acknowledgements
We greatly appreciate the enlightenment, comments, and
suggestions given by the anonymous referees, the editor, Ming
Liu, Kong-lin Ke, Ding Chen, Maoyong Cheng, Rui Li, and the
seminar participants at the School of Economics and Finance of
Xi'an Jiaotong University. All errors remain our responsibility.
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