Regional effects of export tax rebate on exporting firms: Evidence from China

This paper extends a model from 2003 to separate the direct and indirect impact of an export tax rebate on the intensive margin of firm-level export sales at the subnational level. The direct impact of the rebate is associated with a reduction of an exporting firm's variable costs, while the indirect impact manifests itself through higher regional wages as a result of increased demand for local labor. First, the empirical results imply that a 1 percent rise in the export tax rebate rate increases the export sales among continuing exporters by 0.2 percent through the direct channel. Second, through the indirect channel, a 1 percent difference in the regional rebate causes a 0.02 percent difference in exporters' sales growth. Both effects are statistically significant, and are consistent with the model's predictions.