Does Local Government Debt Reduce Urban Economic Inequality? Evidence from Chinese Cities

As China pursues sustainable development goals, the rapid accumulation of local government debt raises questions about its impact on economic inequality. Inequality represents a key dimension of sustainability and a core challenge for developing economies. Our paper examines how city-level local government debt influences economic inequality in China. Using a dataset of 1680 city-year observations from 2015 to 2020, we analyze the relationship between local government debt ratios and the Gini coefficient derived from nighttime light intensity data. Our results show that as local government debt rises, urban economic inequality falls. Further mechanism analysis suggests that debt-financed investment reduces inequality through the development of infrastructure, industrial parks and logistics facilities. Our findings contribute to the literature on local government debt, economic inequality, and the political economy of local government behavior in China. Our results suggest that debt-financed investments may serve as a tool for fostering more equitable and sustainable development.