The Effect of the Digital Divide on Household Consumption in China

Over the past decade, the rapidly digitizing economy and expanding digital divide have attracted much attention in both academic and policy research. Access to computers and the Internet has become increasingly important in the digital age. This paper investigates the compounding impact of the digital divide on household consumption in China. Using the 2017 and 2019 waves of the China Household Finance Survey (CHFS), we find that the digital divide significantly decreases household consumption: For every unit increase in the digital divide, the level of household consumption will drop by about 28 percent. This negative impact stems from an integrated channel of (i) rising unemployment, (ii) intensified liquidity constraints, and (iii) declining financial literacy. We further discover that the digital divide has differential impacts on household consumption across categories and hinders consumption diversification. The results are robust after taking into account potential endogeneity due to sample selection, household heterogeneity, and reverse causality. Our findings shed new light on some little-documented evidence and have profound implications for related socio-economic policies that fully utilize technology to drive efficiency and inclusivity in the digital economy