Citizenization and urban–rural income inequality: Evidence from the reform of hukou system in China

• Hukou reform-led citizenization reduces urban–rural income inequality. • Citizenization promotes s individual market integration and regional labour absorption. • Informal institutions complement the effects of citizenization. • Citizenization advances the inflection point of urban–rural income convergence. Amid global income inequality, identity liberalization presents a viable solution. Overcoming traditional data acquisition limitations, this study integrated geographic information systems and gridded satellite dataset, utilizing 1 km-resolution nighttime light intensity, population and township-level administrative data. Theil index quantifies county-level urban–rural income inequality, while the generalized difference-in-differences method, using China’s reform of hukou system as a quasi-experiment, demonstrates that citizenization significantly mitigates urban–rural income inequality, especially under institutional discrimination. The underlying mechanisms operate through two channels: First, dismantling identity barriers enhances rural residents’ access to health security and social mobility, fostering their market integration capacity; Second, eliminating regional constraints optimizes regional market absorption capacity by facilitating the farmland marketization, technology diffusion, and job opportunities. As a complement to informal institutions, regions with deep-rooted Confucian and clan cultures exhibit stronger reform synergy, whereas pronounced dialect barriers hinder effectiveness. Over time, citizenization mitigates urban–rural income inequality exacerbated during early urbanization, accelerates income convergence, and advances the inflection point of urban–rural disparity, fostering societal income equalization.