The Impact of Exports on Top Income Inequality: Evidence from China

【Authors】

ZENG Shuai, LUO Changyuan & HU Bo

【WorkUnit】

ZENG Shuai（East China Normal University, 200062）；LUO Changyuan, HU Bo（Fudan University, 200433）

【Abstract】

China’s pursuit of a new development dynamic and steady advancement toward common prosperity have underscored the importance of understanding the impact of international trade on domestic income distribution. While top income inequality constitutes a critical dimension of income distribution, it has received limited attention in the Chinese literature on globalization and inequality. 
This paper addresses this gap by proposing a conceptual framework to examine how exports affect top income inequality and provides empirical evidence based on firm-level data from listed Chinese companies between 2005 and 2020. The study treats executives as the top income group and uses the income gap between executives and ordinary employees within firms as a proxy for top income inequality. To address potential endogeneity, the paper constructs an instrumental variable based on a gravity model, leveraging variation in export demand driven by foreign market conditions. This approach isolates the exogenous component of export fluctuations and allows for a causal interpretation of the effect of exports on top income inequality. The results show that export expansion significantly increases top income inequality. This finding is robust to a range of specification checks, including the inclusion of additional controls and alternative instrument constructions. The further analysis identifies several mechanisms through which exports widen top income disparities: rising returns to managerial talent, rent-sharing effects, executive-biased technological progress, and managerial power. The effect is more pronounced in industries with greater exposure to high-income export markets and those more reliant on ordinary trade. Ownership heterogeneity also matters: the inequality-widening effect of exports is mainly concentrated in private firms. The paper further examines the sources of rising top income inequality by decomposing changes into within-firm and between-firm components. The analysis suggests that the growing share of top incomes in China is primarily driven by widening within-firm income gaps rather than differences across firms. 
This paper contributes to the literature in several ways. First, it enriches the literature on income inequality in China by shifting attention toward the top end of the distribution, a perspective largely neglected in previous studies that focus on labor income shares or rural-urban income gaps. Second, it adds to the broader literature on globalization and inequality, which has mainly centered on developed countries, by providing empirical evidence from China—a large developing economy deeply integrated into global trade. Moreover, by identifying previously understudied mechanisms, such as rent-sharing and technology biases favoring executives, the paper offers new insights into the channels through which exports may reshape domestic income hierarchies. Finally, the empirical strategy and the construction of a firm-level proxy for top income inequality offer a useful template for future studies on distributional effects in developing economies.

JEL: F16, F66, J31

【KeyWords】

Exports, Top Income Inequality, Within-firm Inequality, Common Prosperity