An Empirical Study Of The Relationship Between Financial Development And Urban-Rural Income Gap

As the core variable of modern economic, financial development is playing an increasingly important role in the economy. It will spur economic growth on the one hand, and lead to the redistribution of income on the other hand. Although China’s economy has maintained a high growth rate in recent years, but the widening income gap, especially urban-rural income gap has been a social and economic challenge. Since 2000, scholars began to study the income distribution effects of financial development, and a lot progress has been made in this area. But, opinion is divided on this issue. Overall, the income distributional effects of financial development can be summarized as three hypotheses:the first one is "threshold effect hypothesis", which believing that relationship between financial development and income gap is inverted "u"; the second one is "narrowing hypothesis", which insisting that financial development will narrow the income gap; the third one is "expanding hypothesis", it holds the view that financial development will expand the income gap.This article based on the huge gap between urban and rural income, exploring its causes from the point of view of financial development, and attempted to verify the "inverted u" type relationship of financial development and urban-rural income gap. Therefore, we did the qualitative analysis on factors influencing rural-urban income gap, and selecting variables reflect the structure of employment and investment in urban and rural areas, and the price parity index of industrial and agricultural products, they are used as control variables. In terms of empirical, 2000-2012 years’ panel data was used to estimate the financial development’s income distribution of 31 provinces. In order to make the conclusions more in-depth and more reliable, we used the financial interrelations ratio, financial scale indicator and financial efficiency indicator to measure financial development level respectively, and introduce the square of these indicators. So that we can observe whether urban- rural areas income gap will change as a "inverted u" with financial development level improves.The research indicates that:in most provinces of China, the "inverted u" type relationship of financial development and urban-rural income gap does exist. In addition, when advocating the financial interrelations ratio, there are "inverted u" type relationship between financial development and urban-rural income gap in 23 provinces, and the relationship is significant in 15 provinces. When advocating financial scale indicators and financial efficiency indicator, they both have 19 provinces appear "inverted u" type relationship between financial development and urban-rural income gap, but the significant provinces are decreasing. Considering financial interrelations ratio is much more comprehensive in the three variables, we further analyzed reasons for the inconsistent results and the inter-linkages between them.This article also shows that the relationship between rural-urban employment structure (known as "the share of provincial non-farm employment population in total employment") and urban-rural income gap is indiscipline, nearly half of the provinces’coefficient is negative or positive, and each has several provinces significant respectively; rural-urban investment structure(known as "the share of provincial urban investment in fixed assets in total investment") has a negative relationship with urban-rural income gap; Industrial and agricultural product prices ratio (known as "the ratio between provincial producer price index and the agricultural producer price index") also has a negative relationship with urban-rural income gap, but the significant provinces are indiscipline. We did an in-depth analysis on this.At last, we also put some policy analysis on this according to the estimation of model.