The impact of transfer payments on urban-rural income gap: Based on fuzzy RD analysis of China's midwestern county data

Background: China's long term Gini coefficient is higher than the international warning line and the urban-rural income gap is still serious, meanwhile the transfer payments targeted adjusting the income distribution are increasing in recent years, which indicate that we should examine the impact of current transfer payment system on income gap. Methods: By choosing Develop-the-west Strategy that is a quasi-natural experiment and applying regression of discontinuity of location, using 1054 counties data of 15 provinces in Midwestern China from 2000 to 2007, we analyze the impact of transfer payments on urban-rural income gap in this paper. Results: The results show that local government in western China paid more transfer payments than in the central region, however, the income gap between urban-rural residents in the western region increased by 20%. The widening effects are robust in different bandwidth situation such as distance or latitude and longitude. Meanwhile, the mechanism analyses find that urban residents benefit more than rural residents from transfer payments. Conclusions: Therefore, we believe that transfer payments should be more targeted to invest in rural areas, at the same time, the central government should rationalize the structure of transfer payments as soon as possible, and correct the urban bias and structure bias of local fiscal expenditure.