Nectar or Nemesis? The Asymmetric Impact of the Digital Economy on China’s Urban–Rural Income Gap

Common prosperity places the distributional consequences of digitalization at the center of China’s current development agenda. This study develops a two-level analytical framework linking macro-level structures to household income positions. The empirical analysis combines a prefecture-level panel for 2009–2022 with the China Family Panel Studies to examine how city-level digital development relates to the urban–rural income gap. City-level estimates indicate that more advanced digital economies are associated with a wider urban–rural income gap during the sample period. The mechanism estimates are consistent with possible channels involving skill-biased technological progress and unequal digital access and absorptive capacity. Moderation tests indicate that interaction between an “enabling government” and an “efficient market” can mitigate this widening trend. Evidence from the Broadband China pilot further suggests that infrastructure expansion without complementary institutions may intensify polarization, highlighting the limits of policy intervention. At the micro level, digital participation exhibits an inclusive yet asymmetric pattern. Internet use is associated with lower income-based relative deprivation in both groups, with a slightly larger estimated reduction among urban households. Taken together, the evidence points to a distributional tension between digital expansion and equity and supports policies that pair connectivity with stronger capabilities and inclusive institutions.