Inequality and Growth in Rural China: Does Higher Inequality Impede Growth?
Dwayne Benjamin (),
Loren Brandt () and
John Giles ()
No 2344, IZA Discussion Papers from Institute of Labor Economics (IZA)
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 household-level 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.
Keywords: growth; panel data; rural China; inequality (search for similar items in EconPapers)
JEL-codes: O12 O15 P20 (search for similar items in EconPapers)
Pages: 49 pages
New Economics Papers: this item is included in nep-agr, nep-cna, nep-dev, nep-sea and nep-tra
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Published - published as 'Did Higher Inequality Impede Growth in Rural China?' in: Economic Journal, 2011, 121 (557), 1281-1309
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Working Paper: Inequality and Growth in Rural China: Does Higher Inequality Impede Growth? (2006)
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