Does corporate digitalization reduce the firm pay gap? Evidence from China

Abstract

Digital transformation and common prosperity are two of the most discussed topics among Chinese scholars in the new era. Prior research shows that the development of digital technology can help alleviate regional income inequality; however, the specific micro-mechanism and micro-level evidence remain unexamined. This paper addresses this gap by investigating the empirical impact of enterprise digital transformation on common prosperity from the perspective of the internal pay gap within firms. Using 27,639 firm-year observations of China's A-share listed companies from 2007 to 2020, this paper empirically examines the relationship between enterprise digital transformation and the pay gap between executives and employees. The results show that enterprise digital transformation significantly narrows the internal pay gap, and this effect operates mainly by raising the average compensation of ordinary employees rather than by reducing executive compensation, revealing an important micro-level manifestation of how digitalization helps achieve common prosperity. Further analysis indicates that the effect is more pronounced in firms with higher information asymmetry, higher agency costs and stronger employee bargaining power, lending support to the theoretical logic of this paper. By bridging digital economics and income distribution research, this study offers novel insights into the governance implications of corporate digitalization.