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Urbanization and risk preference in China: A decomposition of self-selection and assimilation effects

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  • Shi, Xiaojun
  • Yan, Zhu

Abstract

This paper posits that urbanization reshapes individuals' risk preference by exerting self-selection and assimilation effects. Taking advantage of the unique Hukou system in China, we innovate a quasi-experiment method to elicit the two effects, employing the 2013 wave dataset of the Chinese General Social Survey (CGSS). We find strong evidence supporting our two-effect theory, and the magnitudes of both effects are sizable and similar in scale. The assimilation effect reduces the migrant's risk aversion measurement by 0.606, while the self-selection effect reduces it by 0.715 on average. Overall, urbanization improves migrants' risk appetite, and mediated by this improvement, migrants are more likely than their rural peers to engage in economic activities under uncertainty, as indicated by the evidence that presents when we apply the two-effect theory to investigate how a household decides on risky financial asset investment.

Suggested Citation

  • Shi, Xiaojun & Yan, Zhu, 2018. "Urbanization and risk preference in China: A decomposition of self-selection and assimilation effects," China Economic Review, Elsevier, vol. 49(C), pages 210-228.
  • Handle: RePEc:eee:chieco:v:49:y:2018:i:c:p:210-228
    DOI: 10.1016/j.chieco.2017.04.009
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    More about this item

    Keywords

    Risk aversion; Migration; Urbanization; Assimilation; Self-selection;
    All these keywords.

    JEL classification:

    • P25 - Economic Systems - - Socialist Systems and Transition Economies - - - Urban, Rural, and Regional Economics
    • R23 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population
    • D1 - Microeconomics - - Household Behavior
    • J61 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Geographic Labor Mobility; Immigrant Workers
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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