We study portfolio and other behavioral responses to idiosyncratic risk in
household panel data for rural China. One quarter of wealth is held in unpr
oductive liquid forms. However, only a small share of this appears to be a
precaution against income risk. We estimate that eliminating income risk wo
uld reduce the share of wealth held in liquid form by less than one percent
age point. Furthermore, this effect is largely confined to middle income gr
oups; hi.-h-income households do not, it seems, need to hold unproductive p
recautionary wealth, and the poor probably cannot afford to do so. We find
no evidence that income risk discourages schooling, but it does appear to i
nhibit the temporary out migration of labor. (C) 2001 Elsevier Science B.V.
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