Abstract
This paper presents a simple model of subsidies with export share requirements (ESR) in a heterogeneous firm environment. A two-country general equilibrium version of the model with a single 100% ESR is calibrated using firm-level data from the 2002 wave of the Business Environment and Enterprise Performance Survey collected by the World Bank for China. The calibrated model is used to gauge the change in subsidies with ESR that is consistent with the fall in the share of pure exporters, firms exporting all their output, observed in China, from 25.7% in 2002 to 11.1% in 2013. Our results indicate that a 6.9% reduction in the ad-valorem subsidy rate available to firms that export all their output is consistent with the observed fall in their share of exporting firms. Expenditure in subsidies (as a share of value-added) falls by 66% and welfare in China increases by 1.76% while real income in the rest of the world falls by 0.59%.
Highlights
China’s integration into the world economy has been marked by vigorous export promotion combined with a steadfast commitment to protecting its domestic market
Defever and Riano (2014) back out the unobserved subsidies following a calibration strategy which utilizes data on the overall export intensity distribution of a country and the productivity premia estimated for exporters identified as enjoying subsidies with export share requirements (ESR) relative to exporters that do not benefit from this policy and domestic firms
Our results show that a reduction of 6.9% in the ad-valorem sales subsidy rate offered to pure exporters suffices to replicate the observed decline in their share among exporting firms
Summary
China’s integration into the world economy has been marked by vigorous export promotion combined with a steadfast commitment to protecting its domestic market. A Chinese firm can choose between three potential modes of operation: (i) produce for the domestic market alone, which entails paying a fixed cost fd, (ii) become a regular exporter selling both domestically and abroad, by paying a fixed cost of exporting fx in addition to the fixed cost of operating in the domestic market or (iii) become a pure exporter, i.e. a firm that exports all its output because it faces a 100% export share requirement.4 The latter option requires the firm to pay a fixed cost fx and enables it to receive an ad-valorem subsidy s on its sales. Let φpsq be the productivity level such that a firm would be indifferent between selling only in the domestic market and operating as a pure exporter. If on the other hand, it is the case that a very large subsidy stops firms from producing uniquely for the domestic market, we can define sm ax as the subsidy value for which φpsm axq “ φ, i.e. Proposition 1 summarizes the conditions under which the three modes of production arise in equilibrium. Ate domestically, firms with productivity levels φ P φpsq, φpsq choose to operate as pure exporters, and firms with φ ě φpsq self-select into regular exporters
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