The effect of digital government on within-firm pay inequality: evidence from China

Purpose Digital government has gained increasing attention in recent years, but its role in reducing within-firm pay inequality remains underexplored. This study aims to explore whether and how digital government affects within-firm pay inequality. Design/methodology/approach Using panel data from 31 provinces in China from 2009 to 2023, the authors treat the phased implementation of the “province-level government service integrated platform” as a quasi-natural experiment. By applying a multiple-period difference-in-differences model, they investigate the effect of digital government on within-firm pay inequality. Findings Digital government reduces within-firm pay inequality by 3.85%. This result remains valid after rigorous endogeneity robustness tests, including instrumental variable, parallel trends tests and placebo testing. The primary mechanism focuses on reducing excessive executive compensation, rather than affecting ordinary employees’ pay. Specifically, digital government enhances corporate information transparency and reduces rent-seeking, thereby diminishing excessive executive compensation. This effect is particularly pronounced in large-sized enterprises, private enterprises, as well as digital governments that focus on strong information disclosure or deep government-enterprise interaction. Furthermore, digital governance helps alleviate the negative impact of pay disparities on labor efficiency and firm productivity. These findings suggest that digital government inherently possesses strong social regulatory and developmental functions, capable of promoting social equity and common prosperity. Originality/value The paper’s contributions are threefold. First, from the perspective of income distribution, it expands the analytical frontier of digital government’s economic consequences. While previous studies have mainly focused on the effects of digital government on innovation (Hao et al., 2024; W. Tan et al., 2024) and efficiency (Ding et al., 2024; Xu and Jin, 2024), its role in income distribution and social equity has been largely overlooked. By examining within-firm pay inequality, the study uncovers that digital government reshapes internal income structures, promoting more equitable compensation systems and potentially enhancing social equity. Second, by introducing digital government as a novel governance tool, it provides a more precise and adaptive solution to the persistent problem of pay inequality, specifically by uncovering how it curbs excessive executive compensation. Prior research provides mixed evidence on the effectiveness of traditional policy tools in narrowing executive-employee pay gaps (Gao et al., 2024; Li and Ju, 2024). They introduce digital government as a novel explanatory variable and demonstrate that it is a more efficient intervention tool for addressing income inequality within firms. Third, it shows how data-driven precision governance enhances the effectiveness and efficiency of public intervention in corporate behavior. Traditional governance tools often suffer from high costs, low accuracy and delayed feedback. In contrast, digital government enables real-time monitoring, targeted regulation and cross-agency coordination. These features allow it to limit executive performance manipulation and rent-seeking more effectively, offering theoretical insight into how emerging economies can leverage digital governance to improve internal firm equity.