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Safety nets and investment choices

Author

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  • Wang, Chuhong
  • Liu, Xingfei
  • Tani, Massimiliano
  • Zhao, Yan

Abstract

We examine how reducing ‘background risk’ – the unobserved uncertainty in investment settings – affects household portfolios when individuals unexpectedly gain a comprehensive safety net encompassing health insurance, pension, and other benefits. Leveraging a natural experiment from China's property rights reform and RUMiC data, we find that the reform increases household savings rates and investments in risky assets, indicating that lower background risk enables households to allocate more resources to higher-return, more productive investments. Our results underscore institutional safety nets as effective policy tools to promote risk-taking and capital accumulation in emerging economies.

Suggested Citation

  • Wang, Chuhong & Liu, Xingfei & Tani, Massimiliano & Zhao, Yan, 2025. "Safety nets and investment choices," Emerging Markets Review, Elsevier, vol. 68(C).
    • Handle: RePEc:eee:ememar:v:68:y:2025:i:c:s1566014125000603
    DOI: 10.1016/j.ememar.2025.101311
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    Keywords

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    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G50 - Financial Economics - - Household Finance - - - General
    • J18 - Labor and Demographic Economics - - Demographic Economics - - - Public Policy
    • H13 - Public Economics - - Structure and Scope of Government - - - Economics of Eminent Domain; Expropriation; Nationalization

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