Digital financial inclusion and urban-rural disparities

Abstract

This study explores whether digital financial inclusion acts as an equalizer or a divider in reducing China's urban–rural economic disparities. Using provincial panel data from 2011 to 2022, we employ multiple empirical methods to investigate the relationship between digital financial inclusion and regional income gaps. Baseline regression results indicate a significant negative association between digital finance and the urban–rural income gap. Dimensional decomposition reveals that usage depth has a stronger convergence effect than coverage breadth, emphasizing that access must be matched by effective use of digital services. Mediation analysis identifies industrial structure upgrading as a key transmission mechanism, suggesting that digital finance promotes convergence by enhancing both immediate financial service accessibility and longer-term economic transformation. Threshold regression analysis indicates that the equalizing effects of digital financial technologies are somewhat more pronounced in regions with lower foreign investment penetration and innovation capacity, challenging assumptions about the necessity of high absorptive capacity for technological benefit. To further ensure the validity of our results, we address endogeneity concerns through instrumental variable regression, propensity score matching, and the Heckman two-stage model. The core findings remain robust across all approaches. Additionally, heterogeneity analysis reveals that the impact of digital finance on narrowing urban–rural disparities is particularly strong in western provinces and in regions north of the Hu Huanyong Line, where traditional financial barriers are most evident. Together, these findings highlight digital financial inclusion as a convergence-promoting force, particularly in less developed areas, and provide practical guidance for policy interventions aimed at reducing regional income gaps and promoting inclusive growth.