The Effects of Digital Development on Urban–Rural Inequality in China

ABSTRACT This study examines the relationship between digital development and urban–rural income inequality in China using provincial panel data from 2012 to 2022 and a two‐step system GMM estimator. Digital development is decomposed into four dimensions: digital infrastructure, digital industrialization, industry digitalization and digital innovation. Results based on the Theil index show that overall digital development, digital infrastructure and digital industrialization exhibit symmetric offsetting dynamics: contemporaneous and lagged coefficients offset each other. Industry digitalization—the digital transformation of traditional industry—is uniquely associated with persistent widening of the gap. Digital innovation is not statistically significant in either period. High‐inequality provinces show convergence dynamics accompanying overall digital development, though this pattern is not robust to the lag specification. The gap‐narrowing associations of digital infrastructure and digital industrialization are significantly stronger where rural entrepreneurship is high relative to urban entrepreneurship. An extended analysis using the Gini coefficient shows that the widening pattern for industry digitalization is robust across both measures. For overall digital development, the offsetting pattern found under the Theil index does not apply to the Gini: the corrective, gap‐narrowing movement is not broad‐based. JEL Classification: O33, O18, R11