Digital inclusive finance and rural household subsistence consumption in China

Abstract

This paper examines the impact of digital inclusive finance (DIF) on the subsistence consumption of rural households in China. We find that rural residents in areas with well-developed DIF tend to have greater subsistence consumption. Channel analyses show that such tendencies can be explained by the income growth effect and vulnerability mitigation effect associated with DIF. The income growth effect occurs as the development of DIF promotes rural residents’ income. Income growth is stimulated via improved entrepreneurship to earn operational income or inducing rural-to-urban migration to earn wage income. Meanwhile, the observed vulnerability mitigation effect suggests that DIF could reduce rural residents’ future income uncertainty by alleviating the impact of exogenous shocks. Furthermore, we apply Lasso algorithms to predict expected consumption, and find that the development of DIF is associated with a higher probability for overconsumption in rural households. Such side effect occur mainly among individuals with weak time preferences. We conclude that, the development of DIF has merits, because doing so is beneficial to increasing rural residents’ economic resilience and building an inclusive, sustainable and prosperous society in the post-COVID-19 era.