Behavioral responses to risk in rural China

We study portfolio and other behavioral responses to idiosyncratic risk in household panel data for rural China. One quarter of wealth is held in unproductive liquid forms. However, only a small share of this appears to be a precaution against income risk. We estimate that eliminating income risk would reduce the share of wealth held in liquid form by less than one percentage point. Furthermore, this effect is largely confined to middle income groups; hi.-h-income households do not, it seems, need to hold unproductive precautionary wealth, and the poor probably cannot afford to do so. We find no evidence that income risk discourages schooling, but it does appear to inhibit the temporary out migration of labor. (C) 2001 Elsevier Science B.V. All rights reserved.