Effect of social security system on consumption through income and uncertainty: Evidence from China

Abstract

In our paper, we test how the social security system affects citizens' consumption behavior through narrowing the income gap between residents with different social status and decreasing the uncertainty of income and cost. In the theoretical part, we firstly extend the model of Keynes to test the income distribution hypothesis; then, we use the coefficient of absolute risk aversion (CARA) model and a two-period model to test the uncertainty hypothesis. Empirically, (1) we use China's data (2003-2012) to test the theoretical results, and find that the social security system has a positive effect on consumption by reducing the income gap; (2) according to a 10-year panel data (2003-2012), we find that reducing income uncertainty can increase consumption. Besides, medical insurance and endowment insurance have a positive impact on consumption by reducing citizens' cost uncertainty, but to different extents.