Working Paper No. 302 - Export Tax Rebates and Resource Misallocation: Evidence from a Large Developing Country - Dallas Fed

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 codes: F13, F14, F12, F6, O19, O24, O38 * Ariel Weinberger, 308 Cate Center Drive, Room 158 CCD1, Norman, OK 73019. [email protected]. Qian Xuefeng, Zhongnan University of Economics and Law, 182 Nanhu Avenue, East Lake High-Tech Development Zone, Wuhan 430073, P. R. China. [email protected]. Mahmut Yahar, 701 S. West St., Campus Box 19479, Arlington, TX 76019. [email protected]. We thank participants at the International Industrial Organization Conference 2016, especially our discussant Ricardo Lopez, for insightful comments. The views in this paper are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Dallas or the Federal Reserve System. Export Tax Rebates and Resource Misallocation: Evidence from a Large Developing Country