DP17820 Unequal Transition: The Making of China's Wealth Gap
This paper studies the evolution of wealth inequality in urban China since its reform in the early 1990s. Motivated by the stylized facts along China's growth process, we propose a rich heterogeneous-agent dynamic equilibrium model with endogenous migration, occupation, and nondurable and durable consumption (housing) choices subject to various frictions to quantitatively assess the mechanisms behind the observed increase in wealth inequality. We find that the persistent financial market friction that entrepreneurs face plays a key role, as it ensures that the wealth brought by rapid capital accumulation is accrued predominantly to entrepreneurs. In addition, shutting down migration and entry barrier reforms mitigates the increase of the top 10% wealth share from the observed 19 percentage points to 14 and 10 percentage points respectively over the 1995-2021 period, though both lowering aggregate growth at the same time. A slower housing price appreciation, on the contrary, would exacerbate the rising wealth inequality.