This paper estimates the relationship between initial
village inequality and subsequent household income
growth for a large sample of households in rural China.
Using a rich longitudinal survey spanning the years
1987–2002, and controlling for an array of household
and village characteristics, the paper finds that households
located in higher inequality villages experienced
significantly lower income growth through the 1990s.
However, local inequality’s predictive power and effects
are significantly diminished by the end of the sample.
The paper exploits several advantages of the householdlevel
data to explore hypotheses that shed light on the
This paper—a product of the Human Development and Public Services Team, Development Research Group—is part
of a larger effort in the department to understand the relationship between inequality and economic performance. Policy
Research Working Papers are also posted on the Web at http://econ.worldbank.org. The author may be contacted at
jgiles@worldbank.org.
channels by which inequality affects growth. Biases due
to aggregation and heterogeneity of returns to ownresources,
previously suggested as candidate explanations
for the relationship, are both ruled out. Instead, the
evidence points to unobserved village institutions at
the time of economic reforms that were associated with
household access to higher income activities as the source
of the link between inequality and growth. The empirical
analysis addresses a number of pertinent econometric
issues including measurement error and attrition, but
underscores others that are likely to be intractable for all
investigations of the inequality-growth relationship