Factor Decomposition of Chinese Rural Income Inequality: New Methodology, Empirical Findings, and Policy Implications

This paper is an attempt to explore the factors behind the changes in rural income inequality in China in the second half of the 1980's by decomposing overall rural income inequality into contributions by different sources of income. Furthermore, by extension of Shorrocks' decomposition rule (Shorrocks, 1982, Econometrica 50, 1:193–211, Jan. 1982), the contribution of each source of income is further decomposed into its between-regions and within-region contributions. Statistical tests are developed to ascertain whether the changes in the contributions are statistically significant. The policy implications of the empirical findings with respect to region-based redistributive and preferential policies are discussed. J. Comp. Econom., September 1998, 26(3), pp. 502–528. Chinese University of Hong Kong, Shatin, NT, Hong Kong.