Household Financial Vulnerability to Income and Medical Expenditure Shocks: Measurement and Determinants

Abstract

This paper proposes a novel ex ante indicator to measure the degree of household financial vulnerability by calculating the probability of falling into financial distress under uncertain income and medical expenditure. The advantage of this measure is that it can reflect the capacity of households to deal with income shock and medical expenditure shock and quantify the degree of financial vulnerability for households beforehand. We employ it to measure the financial vulnerability of Chinese urban and rural households separately by using data from the China Health and Retirement Longitudinal Study (CHARLS) 2011, 2013, and 2015. Further, we analyze the potential determinants and their contributions to financial vulnerability changes. We find that rural households experience higher financial vulnerability than urban households. Furthermore, the investigation into the effects of potential determinants suggests that demographic variables (including age, gender, education, marital status, household size, labor force, and area), health-related variables (including health status, disability, and health shock), and medical insurance variables (including urban employee medical insurance and commercial medical insurance) have significant effects on the financial vulnerability of both urban and rural households. Contribution analysis of the determinants of household financial vulnerability shows that variables including disability, health shock, household size, labor force, and education contribute most to the changes in financial vulnerability.