Working Paper

Export Tax Rebates and Resource Misallocation: Evidence from a Large Developing Country

Abstract: The export tax rebate (ETR) policy is one of the most frequently used policy instruments by Chinese policy makers. This paper therefore provides a vital analysis of its allocation effects. To motivate our empirical analysis for the allocation effects of the ETR policy, we first add a tax rebate to the Melitz and Ottaviano (2008) model and examine the impact of this policy on firms' markup size and resource allocation between eligible and non-eligible firms for the rebates. We use customs transactions, tax administration, and firm-level data to measure the effect of variation in export tax rebates, taking advantage of the large policy change in 2004. A difference-indifference approach allows us to compare the production and pricing decisions of eligible versus non-eligible firms and the distributional implications. We find that an increase in tax rebates shifts production to eligible firms and that tax rebates increase allocative efficiency.

JEL Classification: F12; F13; F14; F6; O19; O24; O38;

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Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Globalization Institute Working Papers

Publication Date: 2017-01-01

Number: 302