Non-Linear Effect of Digital Economy on Urban & Rural Income Gap in Iran

Objective: The considerable progress of technology in 1996 led to the emergence of the concept of a digital economy (Oloyede. et al., 2023), and its role in the development of economic activities was investigated. In a comprehensive definition, the digital economy is a wide range of economic activities that uses digital information and knowledge as the main factors of production, modern information networks as the space of important activities, and information and communication technology as an essential factor of productivity growth (Wang et al., 2023). Accordingly, the digital economy is associated with an increase in production productivity, promotes economic development, and increases the income level of people by increasing the demand for skilled labor (Zheng et al., 2023). Therefore, the digital economy affects the income gap between urban and rural households through the impact on individual income (Dai & Zeng, 2023). However, there is no consensus regarding the positive or negative impact of the digital economy on the household and rural income gap. Some researchers argue that the digital economy improves access to information, raises the yield of agricultural products, and grows employment, which increases the villager's income and consequently reduces the income gap between urban and rural households. On the contrary, some other researchers indicate that the digital economy leads to an increase in income inequality between urban and rural households (Jiang et al., 2022).

Understanding the impact of the digital economy on the income gap between urban and rural households makes policymakers provide the necessary solutions to reduce the income gap between urban and rural households through the adoption of appropriate policies. Due to the importance of the subject, the present research aims to investigate the non-linear effect of the digital economy on the income gap between urban and rural households in Iran.

Method: In the current study, to investigate the impact of the digital economy on the income gap between urban and rural households, following the model of Jiang et al. (2022), the income gap between urban and rural households was considered a function of the digital economy, the logarithm of GDP, the logarithm of the urban population, the logarithm of government expenditures and degree of trade openness. To measure the digital economy, used a composite index including mobile phone subscriptions, fixed phone subscriptions, and internet usage by applying the principal component analysis approach. The data source of the digital economy and urban population is the World Bank; GDP data, consumer price index, government expenditures, and the degree of trade openness obtained from the Iranian central bank, and data on the income of urban and rural households extracted from the Iranian Statistics Center. The data have an annual frequency and cover the period from 1990 to 2021. The consumer price index in the base year 2004 was applied to convert the nominal data to real. Because the current research aims to investigate the non-linear effect of the digital economy on the income gap of urban and rural households, thus, to analyze the relationships between the variables used a threshold regression approach.

Findings: The findings indicate that the digital economy has a non-linear effect on the income gap between urban and rural households. In a way that prior to the threshold level, the digital economy leads to the reduction of the income gap between urban and rural households; however, after surpassing the threshold level, further development of the digital economy increases the income gap between urban and rural households. Also, the logarithm of GDP leaves a negative and significant effect on the income gap between urban and rural households. Economic growth leads to the reduction of the income gap between urban and rural households by increasing the real income of individuals. Government spending has a positive and significant impact on the income gap between urban and rural households. In fact, inefficiency and non-optimal allocation of government expenditures in Iran's economy lead to an increase in the income gap between urban and rural households. Ultimately, results show that the logarithm of the urban population has a positive and significant effect on the income gap between urban and rural households. Because individuals in urban areas can work in high-income industries by using the appropriate facilities and infrastructure, thus, the increase in urbanization is associated with the increase in the income gap between urban and rural households. Trade openness leaves a positive and significant influence on the income gap between urban and rural households. In other words, in the Iranian economy, rising trade openness increases the income gap between urban and rural areas via further improvements in the benefits of urban households.

Conclusion: In the primary phases of the expansion and development of the digital economy, by using the digital economy, farmers can learn innovative ways of production, obtain new information and use advanced technology to produce goods and services, which in turn increases production efficiency. It leads to a rise in agricultural products and reduces the income gap between urban and rural households. However, after the digital economy surpassed the threshold level and the impressive progress of digital technology, the mismatch of rural individual's digital literacy with the rapid progress of the digital economy causes People living in rural areas not to have the necessary skills to advantage of the benefits of the digital economy. Therefore, the low ability of rural people to use digital technology with the high digital literacy of people living in urban areas and the unequal development of digital economy infrastructures in urban and rural areas cause the industry and service sectors to have further growth and development relative to the agricultural, the result of which is the increase in the income of the workers in the industry and service sector compared to the agriculture sector, and as a result, the increase in the income gap between urban and rural households.