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Unintended consequences of tax incentives on export product quality: Evidence from a natural experiment in China
Author(s) -
Kong Dongmin,
Xiong Mengxu
Publication year - 2021
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/roie.12499
Subject(s) - incentive , unintended consequences , economics , product (mathematics) , china , quality (philosophy) , monetary economics , natural experiment , ad valorem tax , tax reform , value added tax , microeconomics , business , public economics , philosophy , statistics , geometry , mathematics , epistemology , political science , law
This study investigates the effects of tax incentives on export product quality. Using a staggered value‐added tax reform in China as exogenous shocks, our difference‐in‐differences estimation shows that tax cuts causally reduce product quality at the firm‐level (product‐level) by 5.3% (8.6%). A plausible mechanism appears to be the output and export expansion, which crowd out human capital and thus undermine quality. The results are more pronounced for non‐state‐owned firms, firms under high tax reinforcement effort, and firms subjecting to high financial constraints. This study provides clear policy implications by shedding light on the unintended consequences of tax incentives on export product quality.