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Urbanization and risk preference in China: A decomposition of self-selection and assimilation effects

Xiaojun Shi and Zhu Yan

China Economic Review, 2018, vol. 49, issue C, 210-228

Abstract: This paper posits that urbanization reshapes individuals' risk preference by exerting self-selection and assimilation effects. Taking advantage of the unique Hukou system in China, we innovate a quasi-experiment method to elicit the two effects, employing the 2013 wave dataset of the Chinese General Social Survey (CGSS). We find strong evidence supporting our two-effect theory, and the magnitudes of both effects are sizable and similar in scale. The assimilation effect reduces the migrant's risk aversion measurement by 0.606, while the self-selection effect reduces it by 0.715 on average. Overall, urbanization improves migrants' risk appetite, and mediated by this improvement, migrants are more likely than their rural peers to engage in economic activities under uncertainty, as indicated by the evidence that presents when we apply the two-effect theory to investigate how a household decides on risky financial asset investment.

Keywords: Risk aversion; Migration; Urbanization; Assimilation; Self-selection (search for similar items in EconPapers)
JEL-codes: P25 R23 D1 J61 Q5 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1016/j.chieco.2017.04.009

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China Economic Review is currently edited by B.M. Fleisher, K. X. D. Huang, M.E. Lovely, Y. Wen, X. Zhang and X. Zhu

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