Digital Finance Use and Household Consumption Inequality: Evidence From Rural China

ABSTRACT Previous research has investigated the relationship between digital finance and consumption, yet the impact of digital finance use on rural household consumption inequality, particularly in developing countries, has been rarely examined. Using data from the 2017 and 2019 China Household Finance Survey (CHFS) and a relative deprivation of consumption index, this paper employs the instrumental variable strategy to examine the effects of digital finance use on consumption inequality of rural households. The modeling approach accounts for the endogeneity of digital finance use. The results suggest that digital finance use can alleviate the consumption inequality of rural households. Propensity score matching (PSM) method and a series of robustness checks corroborate the conclusions. Moreover, the mechanism analysis reveals that digital finance use can narrow income inequality and intensify consumption smoothing channels, thereby alleviating consumption inequality of rural households. Finally, heterogeneity analysis shows that digital finance use has a more prominent role in reducing the relative deprivation of consumption among vulnerable households and in undeveloped areas. And digital finance use mainly alleviates the inequality in higher levels of consumption. Our findings provide a micro basis for constructing economic impact assessment and policy design to reduce consumption inequality and improve the welfare of rural households in developing countries.