Precautionary Behavior, Migrant Networks and Household Consumption Decisions: An Empirical Analysis Using Household Panel Data from Rural China

Abstract

We develop a test of precautionary behavior in the consumption decisions of rural agricultural households. Among surveyed households facing a median level of consumption risk, we find that 10 percent of savings can be attributed to a precautionary motive, and this increases to 15 percent for households with consumption per capita below the poverty line. We next use distant lags of local rainfall shocks uncorrelated with current local productivity shocks and current consumption growth to identify the potential size of long-term migrant networks outside the village, and then present evidence that precautionary saving becomes less important for both poor and non-poor households as the size of the village migrant network increases.

Keywords: Precautionary Saving, Migration, Consumption Growth, Rural China

JEL Classification: D12, D81, D91, O12, O16, O18, Q10, R23