Digital Financial Literacy and Rural Income Inequality

Abstract

Digital finance plays a crucial role in enhancing financial inclusion and decreasing income inequality within developing countries. Given the digital and financial attributes that characterize digital finance, digital financial literacy (DFL) is a critical factor that influences the extent to which this function can be exploited. There is relatively little empirical evidence linking DFL to rural income inequality. Based on the 2017 and 2019 China Household Finance Survey data and two-way fixed effect panel model, this study focuses on rural China and examines the effect of DFL on income inequality. Meanwhile, this study also explores the mechanism of this effect from the perspectives of financial asset allocation and entrepreneurship. The empirical results show that (1) increasing DFL within rural households contributes to decreasing income inequality; (2) DFL can decrease income inequality by enriching the variety of household financial assets and enlarging the proportion of risky financial assets in rural households; and (3) improving DFL can ameliorate rural income inequality by increasing the probability of entrepreneurship. The study’s findings put forward fresh empirical evidence for understanding the relationship and mechanism that exist between DFL and income inequality, and more significantly, provide new suggestions for designing and enhancing financial policies that aim to decrease income inequality in developing countries.