Household Debt and Risk Tolerance: Evidence From China

This paper examines the relationship between the head of household's risk tolerance and household debt in China for a sample drawn from the China Household Finance Survey, 2011, 2013, 2015 and 2017. The effect of risk tolerance on both the decision to hold and the amount of total household debt, housing debt and non-housing debt held is analyzed. The key findings indicate that risk tolerance is positively associated with household debt and non-housing debt. Differences are found in the effect of risk tolerance on household debt across rural and urban households. For example, there exists a positive relationship between risk tolerance and the probability of holding housing debt for rural households while such a relationship is not found for urban households. In addition, the effect of risk tolerance on household debt is larger for rural households.