How do fiscally created one-city monopolies cause intra-provincial inequality in China?

Abstract

Cities in a monopolistic position or possessing certain advantages within provinces induce the dilemma of aggregate economic growth and intra-provincial inequality in China, which remains controversial and unclear. Given the role of provincial capital administrative power in the formation of monocentricity, we propose and demonstrate how fiscally created one-city monopolies (FOCM) cause intra-provincial inequality. The empirical results, through measuring relative fiscal interventions between the provincial capital and the second-largest city in a province during the period 1990–2020, show that fiscally created one-city monopolies increase intra-provincial inequality. As part of a robustness check, we find an intensified impact of fiscally created one-city monopolies on the central and western regions. Endogeneity tests provide consistent evidence. We also point out that the adverse impact of fiscally created one-city monopolies on intra-provincial inequality primarily originates from local capital accumulation and industrial agglomeration. By contrast, industrial upgrading, urbanization, improvement of transportation, and opening-up help reduce this adverse impact.