Income Per Capita Inequality in China: The Role of Economic Geography and Spatial Interactions

(1241) Laura Hering and Sandra Poncet This paper contributes to the analysis of growing income inequality in China. We apply a structural model of economic geography to data on per capita income over 190 Chinese cities between 1995 and 2002, and evaluate the extent to which market proximity and spatial dependence can explain the growing income inequality between Chinese cities. The econometric specification explicitly incorporates spatial dependence in the form of spatially-lagged per capita income. We show that the geography of market access and spatial dependence are significantly correlated with per capita income in China. Market access is particularly important in cities with smaller migration inflows, which is consistent with NEG theory, whereas spatially-lagged per capita income matters more in cities with greater immigration. We conclude that the positive impact of spatially-lagged income partly results from labour mobility between neighbours, so that spatial dependence reflects the influence of migration, knowledge transfers and increasing competition between cities.