Risk preference and relative poverty: An analysis based on the data of China Family Panel Studies

Abstract

It is posited that solving the problem of relative poverty (RP) first requires the identification of its cause. We use data from China Family Panel Studies to examine the impact of risk preference on RP of urban and rural families in China and the underlying mechanism. This paper contributes to the existing body of evidence on the determinants of RP. The results show that a high degree of risk preference is conducive to alleviating families' RP. The effect is still significant after dealing with potential endogeneity through instrumental variables. Furthermore, the effect is more obvious among health insurance participation families, endowment insurance participation families, families with low life satisfaction, non-poor families, especially middle-income families, urban families, male-headed families and families in the West in China. Further analysis suggests that risk preference affects RP by promoting entrepreneurship and credit in urban and rural families. Families with a higher risk preference are more likely to engage in entrepreneurship and utilize credit, which in turn helps alleviate their RP. Overall, this paper provides new empirical evidence for understanding the mechanism of risk preference influencing RP.