Household Income Determination and Regional Income Differential in Rural China

Regional income dispersion is a sensitive issue in China in terms of judging the impact of economic reform. This study looks closely at the issue as to what are the determinants of income variation among households in general, and which are the key determinants of income dispersion among different regions. The study uses the data from a sample survey on 1000 rural households in five Chinese provinces. Household income equations are estimated to assess the determinants of income variations among China’s rural households. Blinder’s (1973) decomposition approach is used to determine whether the regional income differential is mostly due to regional endowment differential or regional premium. Among other interesting findings, the major determinant of regional income dispersion seems to be the degree of regional marketisation. Moreover, the rate of return to most factors is significantly different across regions. These findings suggest that further economic reform in less developed regions and the open up of inter-regional trade and factor mobility are the most important factors in reducing the regional income differential