Mobile Payment and Informal Business: Evidence from China's Household Panel Data

• DOI: http://doi.org/10.1111/cwe.12334
• Date: 01 May 2020
• Published date: 01 May 2020

©2020 Institute of World Economics and Politics, Chinese Academy of Social Sciences

China & World Economy / 90–115, Vol. 28, No. 3, 2020

90

Mobile Payment and Informal Business: Evidence

from China’s Household Panel Data

Xue Wang*

Abstract

This paper uses household panel data to explore the impact of mobile payments on

China’s household business activity. Using a difference-in-difference fixed effect

specifi cation, I fi nd that mobile payment users are more likely to operate small-scale and

self-employed informal businesses. The impact of using mobile payment primarily derives

from the transition of agricultural families to business owners and the development of

informal businesses. The paper illustrates an associated increase in employment and

income for family members, with more pronounced effects on low-income and rural

households. It also provides prima facie evidence of the increase in fund transfers, which

is important for risk sharing that informal businesses may encounter.

Key words: entrepreneurial activity, financial inclusion, mobile payment, small and

micro-business

JEL codes: G29, O16, O33

I. Introduction

In China, the mobile payment (MP) system generated by the widespread use of

mobile phones and networks is a revolution of financial inclusion that could provide

fi nancial services to sections of the population that were previously inhibited by poor

infrastructure and high transaction costs (Suri, 2017). Paying via phone has become a

daily chore in China, and even street musicians and market stalls accept MP. This allows

customers and suppliers to transact via mobile device immediately, helps businesses

save time and reduces the cost of fi nancial transactions (Demirguc-Kunt and Klapper,

2013). The explosive growth of MP has inevitably inspired a great deal of discussion

over the role that the mobile phone network plays.

*Xue Wang, PhD Candidate, National School of Development and Institute of Digital Finance, Peking

University. Email: xue.wang@pku.edu.cn. This research was supported by the National Social Science

Foundation of China (No. 18ZDA091). The author is very grateful to Zhichao Yin, Honghui Zhu, Xun Wang,

Yang Ji and Yiping Huang for their helpful advice and comments.

©2020 Institute of World Economics and Politics, Chinese Academy of Social Sciences

Mobile Payment and Informal Business 91

This paper employs a difference-in-difference (DID) fi xed effect specifi cation using

data from China Household Finance Surveys (CHFS) in 2011, 2013 and 20151 to compare

changes in business participation, employment and income between households that

have adopted MP (users) or have not adopted MP (nonusers). The empirical results lie

in three findings. First, the adoption of MP facilitates informal business participation

for households,2 including registered self-employed small businesses and unregistered

businesses, along with increases in employment and income for family members. The

impact of using MP primarily derives from the transition of agricultural families to

informal business owners and the development of informal businesses. Second, I fi nd a

more pronounced impact on low-income and rural households, groups of the population

previously inadequately served by the formal fi nancial sector. Third, the paper provides

evidence that these effects are at least partly due to the increased likelihood of fund

transfer between friends and family, which could lead to more efficient decisions as a

result of the relaxation of the trade-off between risk and return that small business would

otherwise face.

The paper tests the validity of the results in several ways: (i) it tests for parallel

pre-event trends in outcome variables across users and nonusers; (ii) it performs a

falsifi cation test using data from the period prior to the rapid growth of MP; and (iii) to

address the potential endogeneity concern, the paper uses household proximity to the

nearest node city in the Network Optical Fiber Trunk System (NOFTS) as an instrument

for MP adoption at the household level to obtain a valid check of causal assumption.

The rest of the paper is organized as follows. Section II reviews the development of

the MP system in China and the literature on the impact of MP. Section III introduces

the data and establishes empirical framework. Section IV shows the empirical results.

Section V discusses the robustness checks and Section VI concludes.

II. Background and Literature Review

Since 2013 in China, the use of MP has grown explosively with the rise of third-

party platforms such as Alipay and WeChat Pay, and according to a report by the

People’s Bank of China, MP hit record growth in 2018 with 60.5 billion transactions,

1The surveys were conducted by the Research Institute of Economics and Management at Southwestern

University of Finance and Economics.

2Business activities in this study are classifi ed into two kinds: formal and informal. Formal business includes

four types: (i) companies limited by shares; (ii) companies with limited liability; (iii) partnership enterprises;

and (iv) solely-owned enterprises. Informal business includes two types: (i) registered self-employed

businesses; and (ii) unregistered businesses, such as market stalls and street musicians.