An Empirical Study On The Effect Of Intergovernmental Transfer Payments On The Income Gap Between Urban And Rural Areas

Since the reform and opening up, Chinese distribution structure has changed, from a single revenue channel and absolute egalitarianism in a planned economy period to a variety of distribution, such as labor compensation supplemented by capital and technology. Although the living standards of urban and rural residents generally improved, the income gap is growing. Our income distribution is mainly manifested in two aspects. First, urban-rural income gap is large and at a high level. Secondly, it lacks regulating income distribution policies. Academy of Social Sciences Urban Development and Environment Research Institute released "China Urban Development Report Fourth Series-Focus People’s livelihood (2011 Edition)". It shows that the income gap is 3.23:1, becoming one of the largest countries in urban-rural income gap. Considering the health care, education, unemployment insurance and other non-monetary factors, China’s urban-rural income gap has become highest in the world. Thus, revealing the nature of the urban-rural income gap and its reason to narrow the income gap is of great significance in China.Academia shows the widening income gap reasons mainly focus on the following aspects. First, the income constitution has an effect on urban-rural inequality. Secondly, it is the main factor of the income gap between urban and rural areas, including the basic personal characteristics, differences in human capital, urbanization, policy bias, dual economic structure and fiscal decentralization. According to theoretical and empirical literature, it enriches the study of Chinese urban-rural income gap and deepens our understanding of the problem. It is beneficial to provide a broader idea and vision. So the government has introduced a series of policies of government transfer payments, such as increasing rural education, health and social security transfer payments. However, related data confirms that the scale of China’s intergovernmental transfer payments has been rising, but the income gap still maintains at a relatively high level. Thus, we should analyze the underlying causes leading to widening income gap between urban and rural areas.As the means of adjusting the income redistribution, transfer payments are beneficial to alleviate the shortage of financial resources and make up for supply shortages in rural areas, increasing the income of rural residents. However, the literature proved to be ineffective, it plays to reverse adjustment of income gap. Transfer payments deviate from the goals of adjustment of income distribution. It shows financial expenditure wishes impacts on the use of financial resources, and willingness is subject to financial incentives, the so-called financial system. Therefore, this paper is to analyze the relationship between intergovernmental transfer payments and the income gap between urban and rural areas. Further, including a theoretical framework of fiscal decentralization, intergovernmental transfer payments and income distribution, we construct the system of intergovernmental transfer payments on the influence of urban-rural income gap research system under the fiscal decentralization. Then, we put forward solutions to the question based on empirical testing.The structure of this thesis is as follows.Chapter 1 is introduction in which paper tells about the research background, theoretical and practical significance, research methods, basic framework, innovation points and defining the main concepts.Chapter 2 is literature review. First, this part mainly generalizes the impacts of factors on the income gap between urban and rural areas as the relevant literature. Then, it focuses on the study of the impacts of intergovernmental transfers on urban-rural income gap. Finally, it points out deficiencies, proposing further improvement.Chapter 3 is theoretical analysis of the impacts of intergovernmental transfer payments on urban-rural income gap. It focuses on the relationship between intergovernmental transfer payments and urban-rural income gap. Further, this part constructs the theoretical framework of intergovernmental transfer payments which narrows the income gap between urban and rural areas. Then, including a theoretical framework of fiscal decentralization, intergovernmental transfer payments and income distribution, we mainly analyze the impacts of intergovernmental transfer payments on urban-rural income gap under the fiscal decentralization.Chapter 4 is research on the urban-rural income gap about overall decomposition and regional differences, providing effective support for the next part.Chapter 5 is research on the relationship between intergovernmental transfer payments and urban-rural income gap based on an empirical analysis of panel data. This part analyzes the impacts of intergovernmental transfer payments on urban-rural income gap under the fiscal decentralization, based on fiscal decentralization metrics. It shows that there is a structural change in intergovernmental transfer payments. However, the panel data cannot directly illustrate this problem.Chapter 6 is research on the relationship between intergovernmental transfer payments and urban-rural income gap based on panel threshold model. It shows that there is a structural change in intergovernmental transfer payments.Chapter 7 gives conclusion and policy implications. This part summarizes the research, based on the above theoretical and empirical analysis. Then, it puts forward some corresponding policy recommendations and future prospects.The basic conclusions are as follows.Firstly, wage income difference is the most important factors of urban-rural income gap. According to the definition of urban and rural income structure which made by National Bureau of Statistics, it can be divided into wage income, operating income, property income and transfer income. For the proportion of revenue, wage income is the main income of urban residents. Although the proportion of wage income is declining, it has accounted for about two-thirds of the total income of urban residents. While, operating income is the main income of rural residents. But the proportion had dropped to about half in 2012, wage income growth faster. The proportion of wage income of rural residents has exceeded operating income in the eastern region in 2012. And the proportion of wage income is rising which is more than one-third in the central and western region. For the contribution of revenue, wage income is the biggest contribution to the urban-rural income gap, such as eastern region which is 70%-80%. While, it is declining in the central and western region. The reason is that local residents do not have access to wage income at beginning. With the adjustment of policies, local residents have access to wage income. Therefore, contribution of wage has reduced that reflects the importance of wage income. In a word, wage income is the biggest contribution to the urban-rural income gap. Thus, wage income difference is the most important factors of urban-rural income gap.Secondly, fiscal decentralization is the institutional reason for the expansion of income gap between urban and rural areas. It shows wage income difference is the most important factors in the decomposition of income gap between urban and rural areas. At present, the ratio of urban and rural wage income is 4.7, far more than the ratio of urban-rural income gap which is 3:1. Therefore, the research on the relationship between intergovernmental transfer payments and urban-rural wage income gap is beneficial to expose the reason of expansion of urban-rural income gap lead by intergovernmental transfer payments. It shows that intergovernmental transfer payments not only expand the income gap, but also affect the expansion of urban and rural wage income gap under the fiscal decentralization. Although the fiscal decentralization gives local government fiscal expenditure autonomy, it leads to the alienation of local government behavior under the excitation-growth incentives which is in pursuit of increasing revenue and economic growth. And it brings structural bias in fiscal expenditure, such as increasing constructive expenditure, particularly investment spending as well as urban-biased policies. However, as the main source of income and expenditure of local government, intergovernmental transfer payments which are imperfect and lack supervision enhance structural bias and ignore the supply of public services in rural areas, lead to rural-urban differences in human capital and unfair income distribution. Thus, intergovernmental transfer payments widen the wage income gap between rural and urban areas, eventually leading to expanding income gap between urban and rural areas.Thirdly, there is a structural change between intergovernmental transfer payments and urban-rural income gap. It shows that intergovernmental transfer payments can narrow the income gap to a certain extent without fiscal decentralization. However, intergovernmental transfer payments are realized to expand the income gap between urban and rural areas under the fiscal decentralization. It means there is a structural change between intergovernmental transfer payments and urban-rural income gap. It may not be a simple linear relationship. This paper uses the panel threshold model and takes government transfer payments as the threshold variable, empirically investigating the impact of government transfer payments on urban-rural income gap. It comes to the following conclusions:there exists the non-linear threshold effect of government transfer payments on urban-rural income gap. With the change of the transfer payments, the effect of narrowing the income gap between the urban and rural areas has enhanced and then weakened.