Regional income dispersion is a sensitive issue in China in terms of judging the impact
of economic reform. This study looks closely at the issue as to what are the
determinants of income variation among households in general, and which are the key
determinants of income dispersion among different regions. The study uses the data
from a sample survey on 1000 rural households in five Chinese provinces. Household
income equations are estimated to assess the determinants of income variations
among China’s rural households. Blinder’s (1973) decomposition approach is used to
determine whether the regional income differential is mostly due to regional
endowment differential or regional premium. Among other interesting findings, the
major determinant of regional income dispersion seems to be the degree of regional
marketisation. Moreover, the rate of return to most factors is significantly different
across regions. These findings suggest that further economic reform in less developed
regions and the open up of inter-regional trade and factor mobility are the most
important factors in reducing the regional income differential.