For a long time, low efficiency in the transfer of rural collective land use rights and the ambiguous attribution of collective land property rights have not only restricted the mobility of rural labor factors but have also hindered the release of vitality in the rural collective economy. This has resulted in lagging growth in the income that rural residents obtain from collective economic factors, contributing to the persistent widening of the urban/rural income gap. As an important institutional innovation to address these issues, the effects of the reform of the rural collective property rights system urgently need to be clarified. The reform of the rural collective property rights system constitutes a major initiative in the transformation of the rural land system. Centered on asset verification and valuation, as well as the demarcation of membership rights and the restructuring towards a shareholding cooperative system, it aims to establish a collective property rights regime characterized by clearly defined ownership and fully functional entitlements. This study takes the national pilot reform of rural collective property rights launched in 2016 as a quasi-natural policy experiment, systematically examining the impact of this pilot policy on the internal income gap within households and its spillover effects on the urban–rural income gap. Based on microdata from the China Household Finance Survey (CHFS) and the China Longitudinal Night Light Data Set (PANDA-China), this study constructs a five-period balanced panel dataset covering 2304 rural households across 25 provinces. A relative exploitation index based on the Kawani index is constructed, and empirical analysis is conducted using a combination of multi-period difference-in-differences (Multi-period DID), discrete binary models, and propensity score matching-difference-in-differences (PSM-DID) models. The results show that: First, the pilot reform significantly reduced the level of income inequality within rural areas in the pilot regions, and its policy benefits further generated positive spillovers via market-driven factor allocation mechanisms, effectively bridging the urban–rural income gap. Second, institutional reforms activated the potential of rural non-agricultural economic factors, establishing new channels for a two-way flow of urban and rural factors, becoming an important path to achieve the goal of common prosperity. Third, the policy effects exhibited significant heterogeneity, specifically manifested in the attributes of major grain-producing regions, initial household income levels, and the human capital characteristics of household heads having significant moderating effects on reform outcomes. This study not only provides theoretical support and empirical evidence for deepening rural property rights reforms under the new rural revitalization strategy, but it also reveals the driving role of institutional innovation in factor mobility, thereby influencing the transmission mechanism of income distribution patterns. This finding offers a China-based solution for developing countries to address the imbalance in urban–rural development and the widening income gap.

The issues of income inequality and poverty are intrinsically linked and represent persistent global governance challenges. China faced significant hurdles, including absolute rural poverty and a widening urban–rural development gap. The “Targeted Poverty Alleviation” policy (TPA), implemented from 2014 onward, employed comprehensive measures, including household registration, industrial support, and skills training. By the end of 2020, this policy successfully eradicated absolute rural poverty under the prevailing standard, contributing a Chinese solution to global poverty reduction. Beyond addressing absolute deprivation, whether this policy has impacted relative rural poverty and urban–rural inequality remains a subject of debate in existing literature. Utilizing microdata from the China Family Panel Studies (CFPS) from 2014 to 2020, this study employs the Kakwani measure to measure relative deprivation levels, thereby identifying income disparities both within rural areas and between urban and rural regions. Combining empirical tools, including a Difference-in-Differences (DID) framework, Propensity Score Matching (PSM), and Entropy Balancing method, the analysis finds that the Targeted Poverty Alleviation policy significantly curbs income inequality both within rural areas and across the urban–rural divide. Further investigation reveals that this effect operates through three primary mechanisms: promoting diversified rural livelihoods, improving incomes for impoverished households, and bridging knowledge and information gaps. Heterogeneity analysis indicates that the inequality-reducing effect of the policy is more pronounced in non-major grain-producing regions, low-income provinces, and among vulnerable groups such as the elderly, low-income individuals, and women. This study addresses the lack of detailed micro-level measurement, deepens the explanatory analysis of mechanisms and heterogeneity, and provides a basis for formulating differentiated policies in line with the vision of common prosperity.