Creating Cities and Urban–Rural Income Dynamics: Evidence from County‐to‐District Transformation in China

Abstract Classical development economics theories offer conflicting perspectives on the relationship between urbanization and urban–rural income gaps (URIG). This study examined the impact on URIG of county‐to‐district transformation (CDT), a Chinese government‐led urbanization strategy. Using county‐level panel data from 2000 to 2022, the analysis found that CDT promoted county‐level economic growth, resulting in absolute income gains for both urban and rural residents. However, urban incomes grew at a faster rate, widening the relative income gap. This gap‐widening effect was primarily driven by urban‐biased land allocation and fiscal expenditure preferences, with a more pronounced effect in areas that were farther from the city government and smaller in scale. Agricultural support measures could mitigate this trend. Dynamic analysis revealed that the impact of CDT on URIG followed a short‐term expansion and long‐term convergence trend. These findings provide new evidence regarding urbanization and income disparity and offer policy insights for the promotion of inclusive growth through urbanization in developing countries.