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Inequality and Growth in Rural China: Does Higher Inequality Impede Growth?

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Author Info
Dwayne Benjamin () (University of Toronto)
Loren Brandt () (University of Toronto)
John Giles () (Michigan State University and IZA Bonn)

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Abstract

We explore the relationship between the level of village inequality in 1986, and the subsequent growth of household incomes from 1986 to 1999. Using a detailed householdlevel data set from rural China, we find robust evidence that initial inequality is negatively related to subsequent household income growth. We are able to address a number of econometric issues that affect the use of aggregate data for this exercise, especially measurement error and aggregation: Our results strongly suggest that village inequality has an external adverse impact on household-level income trajectories. However, once we account for possibly fixed village-level unobserved heterogeneity, we find no evidence that changes in inequality are correlated with household income growth: Whatever factor drives the inequality-growth relationship only operates in the “long run.” We explore several possible avenues by which initial inequality – or an unobserved variable correlated with it – affects household income growth. While we do not find the precise mechanism, our findings point toward a class of explanations based on collective choice (like the provision of public goods or determination of local taxes), and away from credit-market based explanations.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2344.

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Length: 49 pages
Date of creation: Sep 2006
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Handle: RePEc:iza:izadps:dp2344

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Related research
Keywords: inequality growth rural China panel data

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Find related papers by JEL classification:
O12 - Economic Development, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
O15 - Economic Development, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
P20 - Economic Systems - - Socialist Systems and Transition Economies - - - General

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Hongbin Li & Yi Zhu, 2004. "Income, Income Inequality, and Health: Evidence from China," Discussion Papers 00006, Chinese University of Hong Kong, Department of Economics. [Downloadable!]
    Other versions:
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