Risk-Sharing Networks, Consumption, and Asset Allocation : Micro-Evidence from China

Family ties and kinship networks play an important role in sharing risk under insufficient social security. In this paper, we use panel data based on a massive household survey in China to examine the heterogeneous risk-sharing networks and their impacts on household finance. Based on a staggered difference-in-difference design, we find that households under negative shocks obtain a larger extent of social capital from extended family members with blood ties and geo-proximities, similar income positions, and lower uncertainty exposures. The vehicles of risk-sharing differ across networks, and direct monetary transfers over quasi-credits are facilitated by altruism and social norms, which substitute household borrowing from financial institutions. Risk-sharing networks have wide welfare implications from short-term and long-term perspectives. They help cushion instantaneous consumption drops and accelerate consumption recovery upon unanticipated negative shocks. However, over-reliance on risk-sharing networks reduces household willingness to engage in life-cycle financial planning and dampens long-term consumption, asset allocation, and financial performance. Such negative long-term effects could be corrected by adequate provision of government subsidies and financial literacy programs