Are the Poor Less Well-Insured? Evidence on Vulnerability to Income Risk in Rural China

Abstract

In rural China, those in the poorest wealth decile are the least well-insured, with 40 percent of an income shock being passed on to current consumption. By contrast, consumption by the richest third of households is protected from almost 90 percent of an income shock.

Jalan and Ravallion test how well consumption is insured against income risk in a panel of sampled households in rural China. They estimate the risk insurance models by Generalized Method of Moments, treating income and household size as endogenous.

Insurance exists for all wealth groups, although the hypothesis of perfect insurance is universally rejected.

Those in the poorest wealth decile are the least well-insured, with 40 percent of an income shock being passed on to current consumption. By contrast, consumption by the richest third of households is protected from almost 90 percent of an income shock.

The extent of insurance in a given wealth stratum varies little between poor and nonpoor areas.

This paper - a product of the Development Research Group - is part of a larger effort in the group to understand private insurance arrangements in poor rural economies. The study was funded by the Bank's Research Support Budget under the research project Dynamics of Poverty in Rural China (RPO 678-69).