Did Higher Inequality Impede Growth in Rural China?

We estimate the relationship between village inequality and subsequent income growth for households in rural China. Using a longitudinal household‐level survey spanning 1987–2002, we find that households from higher inequality villages experienced lower income growth. However, the effect of local inequality fades by 2002. Our evidence points to unobserved village institutions at the time of economic reforms, associated with household access to higher income activities, as the source of the link between inequality and growth. We address several econometric issues including measurement error and attrition, but underscore others that are probably intractable for all investigations of the inequality–growth relationship.