The “Matthew effect” in rebates: How does VAT rebates allocation affect firm export performance

Changes in Value-Added Tax (VAT) rebate rates affect exports. This paper shows, when financially strapped, the timely and efficient allocation of rebates becomes essential. Using a unique panel of Chinese firms with export and rebates information, we show that delay in rebates has negative but unequal effects on firm exports. Delays in rebates also cause more exit and reduce the product scope. Furthermore, we find a “Matthew effect” in allocating rebates: exporters with tighter financial constraints respond more elastically to a delay in rebates, yet they are also more likely to have a higher delay ratio. Thus, reducing rebates delay to the most constrained firms is more effective than a similar reduction to the least constrained firms. In partial equilibrium, correcting the misallocation in rebates would increase Chinese exports by 35%, while eliminating rebates delay would increase exports by 52%.