Fiscal Decentralization and Urban-Rural Income Gap

This chapter uses provincial panel data to empirically examine the incentive mechanisms of “China-style decentralization” that drive local governments to implement city-biased economic policies. By constructing indicators for city-biased economic policies, fiscal decentralization and governmental competition, this chapter explores the impact of decentralization and intergovernmental competition on the widening urban-rural income gap. The results suggest that China’s fiscal decentralization framework, coupled with its centralized political system, encourages local governments to pursue city-biased policies, acting as a “distorting hand”. Moreover, the impact of decentralization on the widening urban-rural income gap shows significant temporal and regional variation.