Are Chinese Individuals prone to Money Illusion?

Using a unique dataset collected through a well-established survey, which was carried out in China, we examine whether Chinese individuals are prone to money illusion. In contrast to the outcomes for US individuals, we find that the Chinese are more likely to base decisions on the real monetary value of economic transactions. We put these observed differences in findings in perspective by comparing the economic conditions in the US and China. * Assistant professor at Tilburg University, researcher at Erasmus School of Economics † Professor at Erasmus School of Economics Correspondence should be addressed to Philip Hans Franses, P.O. Box 1738, 3000 DR Rotterdam, The Netherlands, e-mail address: [email protected] This version: October 14, 2011 2 “It isn’t the sum you get, it’s how much you can buy with it, that’s the important thing; and it’s that that tells whether your wages are high in fact or only high in name.” Mark Twain A Connecticut Yankee in King Arthur’s Court (1889)