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

This paper tests how well consumption is insured against income risk in a panel of sampled households in rural China. The authors 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.

The paper finds that:

• The poorest are the least well-insured, with 40 percent of an income shock being passed on to current consumption;
• 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 non-poor areas.

[Author's abstract]