Economic openness, financial bias, and the urban–rural income gap

Abstract

Abstract We develop a theoretical model to analyze the impact of economic openness and financial bias (i.e., open sector bias and urban area bias) on the urban–rural income gap. Our theoretical model puts forth three propositions, which we empirically test using a dynamic panel data model. We use data from 30 provinces in China spanning from 2004 to 2017 for our empirical analysis. Our results reveal a U‐shaped relationship between the urban–rural income gap and the level of regional economic openness. We also find an inverted U‐shaped relationship between the urban–rural income gap and the open sector bias of regional financial development. Moreover, our analysis indicates a positive relationship between the urban–rural income gap and urban area bias in regional financial development. These three propositions hold true for both nominal and real measures of the income gap.