Fiscal behavior of local governments has great
volatility in China, especially in the period of economic
transition. This paper estimates  fiscal behavior volatility by
making regression analysis of panel data of 30 provinces from 1994
to 2011. Then we establish a dynamic panel model to study the
direct and indirect impact of the fiscal behavior volatility on
the urban-rural income disparity. Empirical results show that
urban-rural income disparity has nonlinear relationship with
economic growth and financial development and that fiscal behavior
volatility expands the urban-rural income disparity directly and
indirectly. The larger fiscal behavior volatility comes  greater
urban-rural income disparity. We also find that the urban-rural
income disparity is further enlarged through dual economic
structure. If one of the economic growth and financial development
is fixed, the other one has an inverted U-shaped relationship with
urban-rural income disparity.