Digital finance, entrepreneurship and the household income gap: Evidence from China

Using three waves of data from the China Family Panel Studies and the Digital Financial Inclusion Index of China, we analyze the relationship between digital finance, entrepreneurship and household income disparity. Following a theoretical analysis, we demonstrate the inverted U-shaped relationship between digital finance and household income gap. The empirical analysis finds that digital finance has a Kuznets curve effect for the Theil index and the Gini coefficient. Our findings remain robust to testing for the endogeneity problem. We also discuss three mechanisms of household entrepreneurship, liquidity constraints, and investment efficiency. For heterogeneity discussion, comparisons include urban and rural areas, different regions, and various income sources, and existing differences are demonstrated accordingly. For example, inflection points vary, which may be attributed to inherent unbalanced development in China and the Chinese-style income segmentation of "within the system" or "outside the system". Our findings further provide empirical evidence that digital finance helps reduce household income equality in the long run, and enriches related research.