<p>Cities are under growing pressure to become more sustainable while also involving residents in shaping urban futures. This study examines how participatory urban innovation relates to sustainable development in the digital era and whether digital inclusion and city context shape this relationship. Using a panel of 100 medium and large cities observed from 2015 to 2024, we construct a participatory innovation index, a multidimensional sustainable development index, and a digital inclusion index. We estimate city–year fixed-effects models with robustness checks, lagged specifications, placebo tests, heterogeneity analysis, and a simple mediation framework. The results show that higher levels of participatory innovation are associated with small but non-trivial improvements in sustainable development performance, even after controlling for income, digital infrastructure, environmental regulation, and time-invariant city characteristics. This study contributes to the discourse on AI ethics and social intelligence by examining how participatory innovation and digital inclusion shape sustainable urban development within the broader context of digital transformation. Digital inclusion is positively related to sustainable development and reduces the size of the participatory innovation coefficient, although evidence for strong mediation is limited. The association between participatory innovation and sustainability is present in both emerging and more developed cities and appears somewhat stronger in emerging contexts. This study highlights the ethical implications of artificial intelligence in the context of digital transformation, emphasizing the need for accountable, transparent, and socially responsible AI systems to ensure inclusive and equitable societal outcomes.</p>