Abstract
China has witnessed remarkable ongoing digitalization with the rapid spread and adoption of the Internet. However, this remarkable development remains uneven between urban and rural populations, and hence result in different impact on their income. Employing data China General Social Survey 2018, this study explores how internet usage affects income gap between the urban and rural China. Relying on the instrumental variables approach to regression analysis, we prove that internet usage contributes to higher increase in annual income for the urban employed compared to their rural counterparts. The RIF decomposition regression results then reveal the effects of differential urban-rural internet usage ratios, explaining the widened income gap between the urban and rural employed in various income levels. The difference in the returns to urban and rural internet usage narrowed the urban-rural income gap for low - and high- income employed, but further contributed to the urban-rural income gap for the middle-income employed.