Safety nets and investment choices

Chuhong Wang, Xingfei Liu, Massimiliano Tani and Yan Zhao

Emerging Markets Review, 2025, vol. 68, issue C

Abstract: We examine how reducing ‘background risk’ – the unobserved uncertainty in investment settings – affects household portfolios when individuals unexpectedly gain a comprehensive safety net encompassing health insurance, pension, and other benefits. Leveraging a natural experiment from China's property rights reform and RUMiC data, we find that the reform increases household savings rates and investments in risky assets, indicating that lower background risk enables households to allocate more resources to higher-return, more productive investments. Our results underscore institutional safety nets as effective policy tools to promote risk-taking and capital accumulation in emerging economies.

Keywords: Background risk; Household investment decisions; Expropriation; Hukou status (search for similar items in EconPapers)
JEL-codes: D14 G50 H13 J18 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ememar:v:68:y:2025:i:c:s1566014125000603

DOI: 10.1016/j.ememar.2025.101311

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