The Complementary Impact of Digital and Traditional Finance on Urban Population Size Through Service Employment: Evidence from Chinese Cities

This study examines whether digital finance (DF) and traditional finance (TF) are substitutes or complements in shaping urban population size, and whether service-sector employment serves as a significant mediating channel for DF and a potential channel for DF–TF complementarity. Although prior research has documented the macroeconomic effects of digital finance, three gaps remain: the role of digital finance in urban population size is largely unexplored; whether DF and TF are complements or substitutes in shaping urban population size remains untested; and the mediating role of service-sector employment requires further evidence. Using panel data from 281 Chinese prefecture-level cities for 2011–2022, we estimate a two-way fixed-effects model with city and year fixed effects, incorporating DF, TF, and their interaction term, with robust standard errors. To address endogeneity, we employ instrumental-variable estimation using historical communication infrastructure and geographic proximity. The dependent variable is the logarithm of urban population size. DF and TF are complements rather than substitutes in shaping urban population size. Service-sector employment is a significant mediating channel for DF and a potential channel for DF–TF complementarity. Heterogeneity analysis reveals that the complementary effect is concentrated in large cities and central/western regions. This study expands the finance–urban population nexus from a financial-system complementarity perspective and offers policy implications for coordinating digital and traditional finance to promote sustainable urban development.