The Price of Growth: Consumption Insurance in China 1989-2009

Growth entails taking risks. This implies that the welfare gains of growth hinge on the ability of households to insure consumption against the risks associated with growth. We exploit a novel and unique opportunity to study this question using as laboratory an economy, China, that has witnessed enormous and sustained economic growth and for which we build a long panel of household-level consumption and income. We find that consumption insurance deteriorates along the growth process with a transmission of permanent income shocks to consumption that triples from 1989 to 2009. The loss of consumption insurance has implications for the welfare assessment of growth across time and space.