Semiparametric analysis of income inequality: An application to China

This thesis presents a semiparametric analysis of changes in the distribution of Chinese household income over the period from 1988 to 1995. In particular, this analysis adopts the semiparametric conditional density estimation technique to study how economic policy reforms and social-demographic trends affect the overall income inequality in China.; It distinguishes itself from previous literature in two ways. First, it is the first paper that focuses on the entire distribution of Chinese household income, rather than Gini coefficient or some other summary measures, to study the changes in income inequality in urban China. This work provides visually clear representations of the shape of the income distributions and where in the distribution that various factors have the greatest impact. The effects of each of factors on changes in various summary measures of inequality are also computed to compare my results with those in other research. Second, two important econometric issues of the counterfactual density estimation methodology are rigorously examined---how to compute the optimal bandwidth and how to test the difference between counterfactual and actual densities.; The results find that both average income and income inequality rose sharply in urban China over this period. In addition, five sets of explanatory factors---changes in household structure, particularly the declining proportion of large families, housing welfare reform, changes in ownership of economic structure, changes in socio-demographic attributes and economic returns to these attributes had contributed to the increase in inequality. These factors together account for about 70 percent of the observed increase in inequality. Changes in demographic attributes are a leading cause of the rising income inequality and each of the other four factors also plays an important role although effects of each factor are more localized. The results demonstrate that secular social and demographic trends are as important as economic policy reforms in explaining changes in the Chinese distribution of household incomes over the period.