Do intergovernmental transfers boost intergenerational income mobility? Evidence from China

Intergenerational income mobility has been widely concerned focusing mainly on the transmission mechanism within families. This paper turns to explore the structural determinants and pays special attentions to the role of intergovernmental transfer. Since the fiscal decentralization in 1990s, intergovernmental transfers become an increasingly critical part in Chinese fiscal system, balancing the fiscal capacities across regions and promoting the equalization of public goods. The question arises naturally as whether transfers targeting at equalization can boost intergenerational mobility. However, little work has investigated this intersection of studies and seldom is known about this question. This paper tries to shed some new lights. Through investigations, it confirms that intergovernmental transfers weaken the income persistence and the effect is especially significant for urban areas; the effects for the rural are mixed. Further explorations indicate that the special-purpose transfer payment has greater effects when measured during college period; notably, entering college may bring the rural children fundamental changes relative to other levels of education. In conclusion, the intergovernmental transfer system is relatively more pro-urban. To better fulfill the equalizing effect of the intergovernmental transfers on both static inequality across regions and dynamic inequality across generations, should the transfers be re-framed with cautions tilting more towards the rural.Meanwhile, the competitive behaviors and (dis)incentives of the local governments should also be taken into accounts.