How prudent are rural households in developing transition economies

Kevin Z. Chen, Zuhui Huang, Ling Jin and Bingxin Yu

No 1127, IFPRI discussion papers from International Food Policy Research Institute (IFPRI)

Abstract: Rural households in developing economies frequently use precautionary saving to cope with income risk. Such prudent behavior can be strengthened in transition economies where more risks are typically faced by households during and after reforms. This paper uses a rich panel of rural households in Zhejiang, China, to examine the correlation between income uncertainty and the target ratio of wealth to permanent income as suggested by the buffer-stock model. The empirical results suggest that Chinese rural households hold a significant level of wealth to mitigate the adverse impacts of income risk. Simulation results show that an increase in income risk leads to a sharp increase in household wealth and precautionary saving could drop substantially if income risk is eliminated. The high level of prudence of rural households under economic transition can help us better understand the developments in China, which will have policy implications for both developing and transition countries.

Keywords: buffer-stock model; Income risk; precautionary saving (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-agr, nep-cmp, nep-dev, nep-mfd and nep-tra
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Citations: View citations in EconPapers (5)

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