Can Growth Compensate Inequality and Risk?---a welfare analysis for Chinese households
It has been widely observed that China's break-neck growth has not been equally shared between rural and urban areas, with urban households' enjoying a much larger proportion. To further test whether regional inequality exists within urban areas, we measure urban households vulnerability in a risky environment and decompose this measure to quantify China aggregate risks, province-level risks and idiosyncratic risks faced by households situated in 31 provinces. Besides, under this framework of analysis, we are able to make welfare comparisons between growth, inequality and different risks. We find that inequality has very big negative effect on households' welfare, while growth is able to compensate nearly half of it; households seem to be able to smooth consumption against risk in both province and individual level, but unable to do so against China shocks, which affect all the households simultaneously.
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