Working Paper: CEPR ID: DP17820
Authors: Yangtian Jiang; Yu Zheng; Lijun Zhu
Abstract: We propose a quantitative theory of wealth creation and distribution during China's transitional growth from the early 1990s, when barriers to setting up private businesses, trading housing, and migrating from rural to urban areas are struck down. In response to the changing economic environment, a small entrepreneurial class emerges and accumulates substantial wealth, whereas the majority working class, partly due to limited investment available from an underdeveloped financial sector, uses housing as the main vehicle of wealth accumulation over the course of a longtime housing boom. Our heterogeneous-agent dynamic equilibrium framework determines growth and equity jointly. We show a reasonably calibrated version of the model matches the rise in urban China's wealth inequality since 1995 almost exactly. We further quantify the relative contribution of different reform measures to the rising inequality and discuss the welfare implications taking into account possible growth-equity trade-offs.
Keywords: wealth inequality; capital accumulation; migration; housing
JEL Codes: E21; O11; O16; O18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| relaxation of barriers to private ownership of capital (P14) | increase in wealth inequality (D31) |
| promoting entrepreneurship (L26) | increase in wealth inequality (D31) |
| housing market (R31) | mitigating force on wealth inequality (D31) |
| migration reforms (J61) | increase in wealth inequality (D31) |
| TFP growth (O49) | increase in wealth inequality (D31) |
| well-functioning financial market (G20) | decrease in wealth inequality (D31) |
| economic reforms (E69) | wealth inequality (D31) |