Income Inequality and Households’ Risky Asset Allocation in China : A Perspective of Social Status Seeking

Based on the data from China Family Panel Studies (CFPS), this paper analyzes the impact of income inequality on the investment of risky assets between urban and rural households. Our results indicate that income inequality has different effects on risky asset investment of urban and rural households. Specifically, the expansion of income inequality significantly boosts the demand for risky assets of urban households while reduces the possibility of rural households. In addition to risky assets, the impact of income inequality on housing asset and productive asset investment also differs between urban and rural households. The heterogeneous effects among different income groups show that the risky asset investment of richer urban households tend to be more sensitive to income inequality compared with richer rural households. We further find those opposite effects may result from the differences in the ways of asset allocation to pursue social status between urban and rural households. In the condition of widening income inequality, the stimulated pursuit of social status motivates urban households to prefer risky assets with high return to satisfy their increasing material desire, while leads rural households to increase investment in human capital and thus crowd out investment in risky assets