Rising Waters, Shifting Finances: Rural Household Decisions Under Flood Risk

ABSTRACT This study examines how flood exposure and credit‐market reform jointly shape household repayment behavior in flood‐prone rural areas. Using monthly household loan records from Jiayu County, Hubei Province, China, during the 2020 flood season, we analyze first‐time overdue behavior and proactive repayment toward overdue debt. We further exploit the 2020 loan prime rate (LPR) conversion reform, which created borrower‐level heterogeneity in exposure to market‐based loan repricing. A Probit and Conditional Mixed Process framework is used to account for binary repayment outcomes and selection into LPR‐based contracts. The results reveal three main patterns. First, rural borrowers exhibit lower postflood first‐time overdue risk than urban borrowers, consistent with stronger precautionary motives or repayment discipline under recurrent flood exposure. Second, LPR conversion is associated with higher postflood repayment vulnerability, suggesting that market‐based repricing exposure may affect perceived repayment burdens and liquidity‐buffer decisions when climate shocks occur. Third, LPR converters are more likely to engage in proactive repayment toward overdue debt after repayment risk becomes salient, indicating observable post‐shock repayment adjustment. These findings show that household financial resilience under flood risk is dynamic and shaped not only by physical exposure, but also by financial contracts and institutional change. The study highlights the need to complement interest‐rate liberalization in flood‐prone regions with localized climate‐risk financial protection and flexible post‐disaster credit arrangements.