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

Family ties and kinship networks play an important role in sharing risk under unanticipated shocks, especially under insufficient social security. In this paper, we use panel data based on a massive household survey to examine the risk-sharing networks and their heterogeneous impacts on household consumption and finance activities in China. Based on a staggered difference-in-difference design, we find that people under negative shocks rely heavily on social capital from extended family members with blood ties and geographical proximities, and the extent of social capital is positively (negatively) correlated with the average level of income position (uncertainty exposure) of extended family members. Regarding the vehicles of risk-sharing, altruism and social norms may facilitate the direct monetary transfer rather than quasi-credit, and further substitute formal borrowing demand from financial institutions. In addition, risk-sharing networks smooth short-term consumption by cushioning instantaneous shocks and accelerating consumption recovery; 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. Furthermore, the risk-sharing effect is more salient under individual shocks than collective shocks, and could be corrected by adequate provision of government subsidies and financial literacy programs