Impact of the Digital Economy on Income Inequality: Evidence from Developing Economies

Year 2025, Volume: 12 Issue: 2, 318 - 334, 13.08.2025

Mohsen Mohammadi Khyareh

https://doi.org/10.26650/JEPR1633492

Abstract

This study examines the nonlinear relationship between digital economy development and income inequality across 40 developing economies from 2010 to 2022, employing a dual-model econometric framework. Combining a baseline fixed-effects panel regression with a partially linear functional-coefficient model, the analysis reveals that the digital economy reduces income inequality, but its marginal effects are contingent on economic development thresholds. The results demonstrate a U-shaped relationship, where the inequality-mitigating impact of digitalisation is strongest at intermediate economic development levels, reducing the Gini coefficient by 0.31 units per unit increase in the Digital Economy Index. Below this threshold, infrastructural and literacy gaps constrain equitable access to digital benefits, while above it, diminishing returns emerge due to labour market precarity and saturation effects. Mechanism analyses identified three critical pathways: digital entrepreneurship, financial inclusion, and labour market shifts. Platforms like Jumia and MercadoLibre lower entry barriers for informal workers, increasing rural incomes by 12%–40%, while mobile money adoption (e.g., M-Pesa) boosts rural savings rates by 22%, narrowing urban-rural gaps. However, gig economy expansion though creating millions of jobs, often perpetuates wage instability, with 54% of platform workers in India earning below the minimum wage. Policy implications emphasise context-specific strategies: low-REL economies must prioritise digital infrastructure and literacy (e.g., India’s Digital India), while high-REL economies should strengthen social safety nets (e.g., Brazil’s MEI program) to formalise gig workers. Entrepreneurship ecosystems targeting marginalised groups, such as Nigeria’s Andela, further amplify equity gains by bridging skill and capital gaps.

JEL Classification : D63 , O15 , O33

Keywords

Digital Economy , Income Inequality , Developing Economies , Nonlinear Dynamics , Entrepreneurship , Policy Design

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