Aggravate or Alleviate? The Impact of Financial Literacy on Income Inequality: Evidence From Double Machine Learning

Income inequality is one of the most critical challenges facing global economic development today, as it undermines social fairness and impedes the healthy development of the economy. While extensive research has explored the determinants of income inequality, the role of financial literacy in addressing this issue remains underexplored. We use data from the China Family Panel Studies and apply a double machine learning model to examine the impact of financial literacy on income inequality. Our empirical analysis demonstrates that financial literacy significantly alleviates income inequality, and this conclusion holds after a series of robustness tests. Mechanism analysis identifies household entrepreneurship, financial participation, and insurance participation as critical channels through which financial literacy alleviates income inequality. Furthermore, moderation effects reveal that the development of the digital economy strengthens financial literacy’s mitigating effect on income inequality. The study also finds that financial literacy’s effect on reducing income inequality is more pronounced in eastern regions, urban areas, households with higher educational attainment, and elderly households. In summary, this research contributes to understanding the practical effects of financial literacy and provides new insights for policymakers seeking to address income inequality through financial literacy.