Confucian Culture, Informal Risk-Sharing, and Vulnerability to Poverty: Evidence from China

Abstract: Informal risk-sharing is often cited as a key factor for sustainable poverty alleviation in developing countries, but the lack of implicit contract enforcement remains an important problem. Using data from the China Labor-force Dynamic Survey (CLDS), we find that Confucian culture has a significant positive effect on reducing households' vulnerability, and such effects mainly alleviate their risk-induced vulnerability. Confucian culture makes the enforcement mechanisms for informal risk-sharing more reliable, thus alleviating the vulnerability to poverty. Even in areas with developed financial markets, this effect is still significant. Further analysis shows that Confucian culture's alleviation effect on vulnerability to poverty will be reduced but not vanish if households participate in the formal risk-sharing market. Confucian culture impacts rural areas more than urban. For migrant households, this mitigating effect is not significant due to their limited social connections in the local area. Our results contribute to the existing literature on the relationship between culture and poverty, providing a new way to deal with the impoverishment caused by the COVID-19 crisis. The lessons learned from China are valuable for other developing countries where vulnerability looms large.