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Institution Distortion and Urban-Rural Income Inequality in China:A Comprehensive Decomposition Framework

【Authors】
SUN Huachen, JIAO Yong
【WorkUnit】
SUN Huachen (Development Research Center of Shandong Provincial People’s Government, 250011)JIAO Yong (Shandong University of Science and Technology, 250031)
【Abstract】

This paper attempts to construct a systematic explanatory framework for the evolution mechanism of urban-rural income inequality based on the key role of institution distortion, which is decomposed into factor productivity effect, institutional distortion effect and transfer reallocation effect. Furthermore, combining the total factor productivity measurement, the evolution characteristics and regional differences of urban-rural income inequality are analyzed, and the urban-rural income inequality in 2020 and 2030 is simulated and predicted, based on the reform process of household registration system and the new-type urbanization development goal. The results show that institutional supply effect has gradually replaced the factor productivity effect and become the biggest contributor of income inequality between urban and rural areas, with the contribution rate of 67.8%, and its influence is more obvious in the relatively backward economic development area. The income inequality between urban and rural areas in China shows a significant “inverted U” feature, but the time to arrive at the “U-shaped” curve peak is obviously different in different regions, with the peak arriving for most provinces (cities) in the three years of 2006, 2007 and 2009. Numerical simulation analysis has found that if the household registration system reform is in place, and the goal of new-type urbanization is achieved, urban and rural income inequality will be further reduced. By that time, the contribution of institutional distortion effect will be declining, and the contribution of factor productivity effect more significant. The conclusion can boost the confidence and determination in strengthening the institutional supply innovation, and accelerating the integration of urban and rural development, and further proves the policy effectiveness of the ongoing comprehensive deepening reform, especially the supply-side structural reform.
 
JEL:O15, D24

【KeyWords】
Urban-Rural Income Inequality, Institutional Distortion, Total Factor Productivity, Numerical Simulation Technology