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

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.