Safety nets and investment choices

We examine how reducing ‘background risk’ – the unobserved uncertainty in investment settings – affects household portfolios when individuals unexpectedly gain a comprehensive safety net encompassing health insurance, pension, and other benefits. Leveraging a natural experiment from China's property rights reform and RUMiC data, we find that the reform increases household savings rates and investments in risky assets, indicating that lower background risk enables households to allocate more resources to higher-return, more productive investments. Our results underscore institutional safety nets as effective policy tools to promote risk-taking and capital accumulation in emerging economies. • We examine how reducing individuals' ‘background risk’ – through an unexpected endowment of a comprehensive safety net – affects household portfolio choices. • We exploit a property rights reform in China, where rural households experience a reduction in background risk due to land expropriation and a subsequent change in hukou status. • We find that the reform increases household savings rates and investments in risky assets. • These results suggest that the removal of background risk enables households to allocate more resources to higher-return, more productive investments. • Our findings highlight the role of institutional safety nets in shaping financial behaviour and underscore their potential as effective policy tools to promote risk-taking and capital accumulation in emerging economies.