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| Social Networks and Household Financial Vulnerability in China |
| YAO Jian, ZANG Xuheng, ZHOU Bowen
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| School of Economics, Shandong University |
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Abstract Effectively preventing and resolving economic and financial risks is one of the major issues of current economic work in China. Among them, household financial risks are an important component. Analyzing the household financial vulnerability is an important point for studying how to prevent and resolve household financial risks. Therefore, exploring effective ways to reduce household financial vulnerability is particularly important. Concurrently, the role of social networks as informal institutions in the economy and society has always been a hot topic in social science research. Especially for developing countries like China, social networks have a significant impact on people's economic behavior and daily life. Does social network relationship affect household financial vulnerability？ If there is a significant impact, what is the specific mechanism？ Is there heterogeneity due to differences in other factors？ These questions are worth exploring in depth.
This paper uses data from the China Household Finance Survey (CHFS) in 2017 and 2019 to examine the impact and mechanism of social networks on household financial vulnerability. The research conclusion is as follows: Firstly, social networks significantly reduce household financial vulnerability. This conclusion still holds after a series of robustness tests, such as overcoming endogeneity, replacing independent variables and dependent variables, replacing instrumental variables, and replacing samples. Secondly, the mechanism by which social networks affect household financial vulnerability is mainly reflected in three aspects: alleviating liquidity constraints, playing a role in risk sharing, and promoting information transmission. Thirdly, social networks have a more significant impact on the financial vulnerability of rural, low-income, low net assets, elderly, low education levels, and risk-averse households. These households have relatively scarce material or human capital. It can be seen that social networks have inclusive characteristics for the healthy and sustainable development of family economy. Fourthly, social networks, as an informal institution, play a complementary role with formal finance in reducing household financial vulnerability.
This paper provides the following insights. Firstly, it is necessary to pay further attention to preventing and resolving household financial risks. Social networks are one of the effective ways to reduce household financial vulnerability. Policy makers can encourage the construction of social networks and better reflect the positive role of social networks. Secondly, to leverage the complementary effects of informal social networks and formal institutions for different groups, and jointly build a household financial safety net. Thirdly, increasing household income and asset levels through multiple channels, constructing a multi-level social security system, and improving credit and insurance markets can help enhance households' risk tolerance. This paper provides experience for other countries, especially developing countries, to pay attention to and reduce household financial vulnerability.
The main contributions of this paper are in three aspects. Firstly, we use the Extended Linear Expenditure System (ELES) to measure household basic living expenses and calibrate existing financial margin indicators to more accurately measure household financial vulnerability. Secondly, we analyze effective ways to address household financial vulnerability from the perspective of social networks. This provides micro evidence for understanding the role of social capital in addressing household financial risks. This not only enriches the relevant research on household finance, but also provides useful insights for improving the ability of households to cope with financial risks. Thirdly, we systematically identify the mechanisms by which social networks reduce household financial vulnerability in terms of alleviating liquidity constraints, sharing risks, and enhancing information transmission. Finally, we explore the different impacts of heterogeneity in urban and rural areas, household characteristics, and head of household characteristics. This provides a reference basis for preventing and resolving household financial risks, improving the stability of the financial system, and helping to safeguard and improve people's livelihoods, continuously enhancing their well-being.
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Received: 31 July 2023
Published: 02 May 2024
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