Household adaptation to economic transformation: the role of financial inclusion in enhancing welfare

Abstract As households navigate demographic and technological shifts, financial inclusion emerges as an important mechanism for enhancing household welfare. We explore this effect in China utilizing a unique household survey panel data. We employ heteroscedasticity-based identification developed by Klein and Vella (2009a; 2010) to estimate the causal effect of financial inclusion. We find that welfare effects of financial inclusion vary across urban and rural areas, and across income groups. Financial inclusion significantly increases overall consumption, but the impact is greater among urban than rural households. The effect is stronger in the case of food consumption. Financial inclusion also decreases consumption inequality, but only among urban households. The uneven effects of financial inclusion across levels of urbanization and commodity types have important policy implications for promoting financial inclusion not only in China but also in developing countries in general.