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

Dwayne Benjamin (), Loren Brandt () and John Giles ()

Working Papers from University of Toronto, Department of Economics

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 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: Inequality; Growth; Rural China; Panel Data (search for similar items in EconPapers)
JEL-codes: O12 O15 P20 (search for similar items in EconPapers)
Pages: pages
Date: 2006-06-19
New Economics Papers: this item is included in nep-agr, nep-cna, nep-dev, nep-sea and nep-tra
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