The Influence of Capital Deepening on Regional Economic Development Gap: The Intermediary Effect of the Labor Income Share

Abstract

At the same time as economic development, the imbalance problem in regional economic development is prominent, which hinders sustainable economic development, especially in China. Explaining the causes of unbalanced regional economic development is an important scientific problem in current economic research. Here, this study takes China as the empirical research area and uses China’s inter-provincial panel data to deeply analyze the impact of capital deepening on the regional economic development gap. As indicated by this study, after a series of potential factors (e.g., industrial proportion, foreign direct investment, and per capita GDP) of the regional development gap are controlled, the capital deepening measured using perpetual inventory can have a strong explanatory power for the regional development gap, i.e., the greater the value of capital deepening, the more significant the regional development gap will be. According to the above conclusion, the effect arising from capital deepening on the regional development gap is still significant, even after the Soviet Aid Project is employed as the current instrumental variable of capital deepening, as well as after the data from the world sample are estimated The study further finds that capital deepening does not directly affect the regional development gap but indirectly affects the regional development gap by affecting the labor income share. Therefore, a higher labor share can narrow the regional development gap.