Cash Versus Housing : The Effect of the Demolition Subsidy on Household Consumption in Urban China

This study complements the in-kind transfer and wealth effect literature by investigating the heterogeneous consumption effects of different forms but equivalent size of wealth shocks associated with public subsidy programs in the urban renewal process. We exploit a quasi-experiment on the subsidy policy offering compensation in cash or housing for a demolition event to residents of urban China. Based on comprehensive survey data, we find that: 1) on average the demolition event has a negative effect on household consumption; 2) ceteris paribus, households receiving a cash subsidy will considerably reduce their non-housing consumption, compared with households receiving a housing subsidy of equivalent value; and 3) this heterogeneity of wealth effects is mainly driven by the trade-off between concerns about uncertainty and liquidity constraints. Further evidence highlights the asymmetric consumption responses to objective and subjective bias of subsidies. Hence, the perception of a wealth shock will reinforce the concerns of uncertainty/illiquidity associated with different types of compensation