Accounting for Income Inequality in Rural China: A Regression-based Approach*

This chapter examines regression-based approaches to inequality decomposition in the literature, exposes the flaws, and proposes a more flexible framework that can be used with any inequality indicator and that imposes few restrictions on the specification of the underlying income-generating function. It describes the contributions of various determinants to total inequality in rural China and provides a prescriptive analysis. The chapter provides a general regression-based framework for inequality decomposition in which the Gini coefficient is used as an example measure of inequality. It investigates the root sources of income inequality in rural China and deals with a summary and policy recommendations. Regional inequality in rural China is increasing over time, which has important social and political implications. Much of the literature focuses on inequality measurements or conventional decompositions, which provide only limited insights into the causes of regional inequality. In China, more than 50 percent of rural income is from farming activities, and non-farm income come mainly from family businesses.