Health shocks, village elections, and household income: Evidence from rural China

•We study the effect of village elections on negative income in rural China.•Variations in timing of the start of elections are used.•A major health shock would reduce a household's income.•Village elections help alleviate such adverse effects by almost half.

Using a sample of 1185 households in 48 Chinese villages for the period 1987-2002, we study the effects of major health shocks on household income and the role played by village elections in mitigating these effects. Major health shocks are defined by abnormal increases in a household's medical expenditure. Our results show that a major health shock reduces households' net income significantly and that village elections alleviate such adverse impacts by almost half. The main mechanism behind this effect is increased coverage of health care insurance, which helps households smooth their consumption when major health shocks happen.