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Behavioral responses to risk in rural China

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  • Jalan, Jyotsna
  • Ravallion, Martin

Abstract

Does risk perpetuate poverty in a credit-constrained economy? Jalan and Ravallion study portfolio and other behavioral responses to measured risk using household panel data for rural China. One-quarter of wealth is held in unproductive liquid forms. But only a small share of this appears to be a precaution against income risk. The authors estimate that eliminating income risk would reduce the share of wealth held in liquid form by less than 1 percentage point. Moreover, that effect is confined largely to middle-income groups; high-income households do not, it seems, need to hold unproductive cautionary wealth, and the poor probably cannot afford to do so. The authors find no evidence that income risk discourages schooling, but risk does inhibit the out- migration of labor. Generally, the results provide only limited support for the idea that uninsured risks promote unproductive portfolio behavior in this setting. There is such an effect, but it is small in magnitude and cannot be deemed an important cause of poverty.

Suggested Citation

  • Jalan, Jyotsna & Ravallion, Martin, 1998. "Behavioral responses to risk in rural China," Policy Research Working Paper Series 1978, The World Bank.
    • Handle: RePEc:wbk:wbrwps:1978
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    Keywords

    Environmental Economics&Policies; Health Economics&Finance; Economic Theory&Research; Banks&Banking Reform; Financial Intermediation;
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    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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