Biography [Curriculum Vitae]

I am a Senior Lecturer (Associate Professor in North America) at the Business School of the University of Western Australia. I received my PhD degrees from the London School of Economics and Political Science (LSE) in 2015 and Peking University in 2005. My research focuses on interplay between taxation, development, and state building. I currently investigate how the tax system and rent extraction in developing countries including China, Sri Lanka, Indonesia, and India are affected by the fiscal regime and political institution, and how the discretionary tax enforcement leads to various undesirable outcomes, including: (1) enormous production efficiency loss; (2) amplification of regional economic and fiscal inequality; (3) policy uncertainty and natural resource curse; (4) corruption; and (5) weak tax capacity.

Email: xgchenist [at] gmail [dot] com

Research Interests

Primary Fields: Public Economics; Misallocation; Development and Growth

Secondary Fields: Innovation; Natural Resources and Environment; Inequality; Economy of China

Published Journal Articles

9. "Un-incorporation and Conditional Misallocation: Firm-Level Evidence from Sri Lanka", (with Ranpati Dewage Thilini Sumudu Kumari,  and Sam Hak Kan Tang)       B. E. Journal of Macroeconomics, 2023. https://doi.org/10.1515/bejm-2022-0107

Abstract Un-incorporated firms are usually found less productive than their incorporated counterparts. However, little is known about the misallocation conditional on firms’ incorporation status and their productivity. This paper investigates the resource misallocation across un-incorporated firms and gauges the consequent aggregate productivity loss in comparison with their incorporated counterparts. We examine the question by using firm-level survey data from Sri Lanka’s manufacturing sector for 2005-2017 that provide unique information about firms’ corporation status. Our findings suggest that misallocation is more severe in unincorporated firms than in incorporated ones, leading to extra 42% aggregate TFP loss to the former. By comparing the sources of misallocation between the two types of firms, we find capital is more misallocated relative to output and there is a stronger positive correlation between firm-specific distortion and productivity across the unincorporated firms. Our findings suggest that the un-incorporated firms suffer additional productivity loss at the aggregate level due to misallocation.

8. "Can Land Misallocation be a Greater Barrier to Development than Capital? -- Evidence from Manufacturing Firms in Sri Lanka?",   (with Ranpati Dewage Thilini Sumudu Kumari,  and Sam Hak Kan Tang, Bei Li)  Economic Modelling, 2023. https://doi.org/10.1016/j.econmod.2023.106368

Abstract We quantify cross-firm misallocation in land and compare it with that in capital. Misallocation arises when a production factor produces greater marginal revenue product (MRP) in some firms than in others because the former firms have to pay a higher shadow production factor price which is usually distorted by persistent institutional factors. Consequently, the aggregate total factor productivity (TFP) could be increased through cross-firm factor reallocation within an industry. Existing literature mainly emphasizes the misallocation in capital and labour, or in agricultural land. Little is done to quantify the misallocation of industrial land. By using annual-firm-level survey data from Sri Lanka's manufacturing sector over 1994–2015, we find that the aggregate TFP gain from reallocating land is about five times of that from capital. Further, we find that firms can hardly grow bigger due to size-dependent land distortion. The results suggest that land distortion can be a crucial barrier to development.

7. "Vulnerability to Tax Enforcement and Spillovers of Corruption: Cross-industry Evidence from China",  (Solo), Journal of Law, Economics, and Organization, 2022. https://doi.org/10.1093/jleo/ewac019

Abstract The article investigates the cross-industry spillover effect of tax enforcement and corruption. I propose a two-sector optimal tax administration model by incorporating vulnerability to tax enforcement (VTE) and corruption into the Allingham–Sandmo framework. Based on two large surveys of Chinese firms, I test the model by using industrial capital-intensity as a proxy for firms’ VTE and exploiting turnover of prefectural secretaries of the Communist Party of China between 2000 and 2007 as a driving force of corruption. The findings suggest capital-intensive industries, which are vulnerable to tougher enforcement, pay higher effective tax rates, and, therefore, have stronger incentives to bribe in order to reduce their tax burden. The bribery produces negative spillovers that raise the effective tax rates of their labor-intensive counterparts. Further evidence confirms that older prefectural secretaries are prone to be corrupt and exhibit stronger tenure effects both on the effective tax rates and on firms’ corruption expenditure.

6. "What Impairs the `Money Machine' of VAT in Developing Countries?", (with Harsha Konara Mudiyanselage), International Tax and Public Finance, 2021. https://doi.org/10.1007/s10797-021-09705-x  Austaxpolicy blog [Report]

Abstract The paper investigates the impact of VAT introduction in 127 developing countries on tax capacity and underlying mechanisms. Using Difference-in-Difference with VAT adopting neighbours as the instrumental variable, we show that VAT increases the share of tax in GDP. However, the increase is mostly channelled through the increase in effective tax rate, while creating an extra tax burden on the existing firms and leading to shrinking tax base. Moreover, the informational role of VAT is not as effective as usually alleged in broadening the tax base by inducing informal firms into the formal sector.

5. "Misallocation and TFP Slowdown over Two Decades: A Firm-Level Analysis in Sri Lanka’s Manufacturing", (with Ranpati Dewage Thilini Sumudu Kumari, Sam Hak Kan Tang, and Bei Li), Applied Economics, 2020, Vol. 53 (38), pp. 4417-35. https://doi.org/10.1016/j.econmod.2023.106368

Abstract We investigate the effect of misallocation induced by firm-specific distortions on aggregate productivity and long-run TFP growth. Using a new firm-level dataset from Sri Lanka’s manufacturing surveys spanning over two decades and the model of Hsieh and Klenow (2009), we show that when misallocation is eliminated the aggregate manufacturing productivity could be boosted by 102% during 1994-2015. In addition, we find that the allocative efficiency exhibits a declining trend over time and this rising misallocation could explain 55% of the manufacturing TFP growth slowdown in Sri Lanka. We further explore underlying causes of the rising misallocation by quantitatively analysing contribution of different types of firms and distortions in different markets. In the end, we qualitatively discuss potential fundamental sources in institutions and policies. Our results reveal that misallocation can be a mechanism underlying the growth slowdown of many emerging economies one decade after the liberalization reform since late 1970s.

4. "Dynamics of Local Cadre Appointment in China", (with Yong Liu, and Xianxiang Xu), China Economic Review, 2020, Vol. 64, Issue 12 (December). https://doi.org/10.1016/j.chieco.2020.101559

Abstract The paper investigates the dynamics of local cadre appointment in China by focusing on the relationship between the appointment of prefectural level leading cadres and the tenure of their superior provincial secretaries of the Communist Party of China. We propose a model featuring trade-off between information gain and brain drain as a key mechanism that shapes the dynamics of the appointment. Using unique nation-wide prefectural level Cadre Statistical Data (1983–1998), we find there exists “appointment political cycle” in inverted-U shape over the tenure of the provincial secretary and it peaks in the third year. The inverted-U pattern is mainly driven by the prefectural cadre who had overlapping previous work experience with the incumbent provincial secretary. Both the officially released GDP growth rate and the investment-GDP ratio are greater in prefectures after the appointment of the prefectural secretary or the mayor by the incumbent provincial secretary than those in other prefectures where both the prefectural secretary and the mayor were appointed by previous provincial secretaries. The findings confirm from a perspective of province-prefecture nexus that the personnel control is a fundamental institutional element in China. Although the appointment is subject to personal connections, it appears that the newly appointed cadres are able to generate better economic performance.

3. "Tax Effort in Developing Countries: Where is Sri Lanka?", (with Harsha Konara Mudiyanselage, and Anu Rammohan), Journal of Tax Administration, 2020, Vol. 6 (1), pp. 162-189. http://jota.website/index.php/JoTA/article/view/265

Abstract This paper investigates the problem of the declining tax/gross domestic product (GDP) ratio in Sri Lanka by estimating the tax efforts of lower-middle-income countries (LMICs). Using a panel data set from 1990-2014 with two stochastic frontier models, we reveal that Sri Lanka’s tax effort declined during that period. Although the two different stochastic frontier analysis (SFA) models used in this paper produce different tax effort estimates, both models show a decline in tax effort in Sri Lanka. Estimations of personal income tax using available micro-level income data reiterate the low level of tax effort in Sri Lanka at present. We further analyze reasons for the weak tax effort in Sri Lanka and propose appropriate policy recommendations.

2. "The Effect of a Fiscal Squeeze on Tax Enforcement: Evidence from a Natural Experiment in China",  (Solo), Journal of Public Economics, 2017, Vol. 147, Issue 3 (March), pp. 62-76. https://doi.org/10.1016/j.jpubeco.2017.01.001 Online Appendix [pdf] Presentation@Faculti (15 minutes) [Video] 

Abstract This paper investigates the impact of the abolition of the agricultural taxes in 2005 across China on county governments' incentives for tax enforcement. I show that the revenue loss of county governments was largely offset by tougher tax enforcement. The incentive for VAT enforcement can be weakened, however, if the county: (1) receives a lower share of total VAT revenues; (2) has a broader VAT tax base; or, (3) has more abundant sources of revenue from land sales. These findings suggest that incentives of local governments can be vital to tax enforcement and to the tax capacity of a country.

1. "VAT Rate Dispersion and Aggregate Efficiency in China",  (Solo), Economic Letters, 2017, Vol. 155, Issue 3, pp. 49-54. https://doi.org/10.1016/j.econlet.2017.03.008 Online Appendix [pdf]

Abstract This paper studies dispersion in the effective VAT rate across manufacturing firms in China and assesses its impact on aggregate production efficiency from 2000 to 2007. Using a structural model based on Hsieh and Klenow (2009), I find that a tax-neutral reform which eliminates the dispersion in VAT rates produces a gain in aggregate TFP in the order of 7.9% of GDP on average in the period 2000-2007.

Submitted Papers

"Environmental Regulation, Local Vulnerability and Enforcement – Evidence from an Emission Limit Policy in China", (with Zhao Li and Bingyang Lv)

"Appropriateness and Effectiveness of Tax Regime: Evidence from VAT Diffusion across Countries", (with Harsha Konara Mudiyanselage)

"A Big Push of Panda from the Ground: Land Subsidy and Structural Transformation of China ", (with Yudan Cheng, Liutang Gong, and Wenjia Tian).

Working Papers

"Burden of Knowledge and the Limits to Growth", (solo).

"Taxational Resource Curse – Evidence from China", (with Jie Bai)

"Can Tax Credit Undo Capital Misallocation – Evidence from China's VAT Transformation Reform", (with Yanchao Xu)

"Firm Clustering and Taxation – Evidence from China", (with Qi dong, and Xiaobo Zhang)

"Land Mis-allocation, Collateral Effects, and Production Efficiency Loss in China", (with Enhui Kou, and Longjian Yang)

Research in Progress

"Misallocation and Aggregate Productivity Gain from Tax Enforcement – Evidence from a Fiscal Squeeze Experiment in China", (with Yanchao Xu)

"Oilfield Discovery, Debt Default Risk and Tax Policy", (with Yu-Hsiang Lei)

"Incentive-Equalisation Trade-off in Flattened Governments with Tax Sharing – Evidence from PMC Reform in China", (with with Pei Li, and Saijie Sun)

"R&D Tax Deduction, Targeting Efficiency, and Innovation", (with Xiaoyong Dai)

"Cleaner Book after a Closer Look? – Evidence from China on the Effect of Tax Enforcement on Listed Companies' Profits Reporting"

"Can Central SOE Affect the Local Tax Enforcement in China?"

Published Chinese Journal Articles

 10. “VAT Rate Reduction, Credit Constraint, and Firm TFP -- Theory and Evidence from Listed Companies”, (with Shumin Yue, and Chunmin Xiao), Economic Theory and Business Management (Ji Ji Li Lun Yu Jin Ji Guan Li in Chinese 《经济与管理科学》), 2023, Vol. 43(6), pp. 13-26.

 9. “How does Fiscal Pressure Affect the Public Service Provision by County Governments?”, (with Jingwen Yu, and Liutang Gong), Journal of Financial Research (Jin Rong Yan Jiu in Chinese《金融研究》), 2018, Issue 1, pp. 18-35.

 8. “Fiscal Pressure, Tax Enforcement, and Regional Inequality", (Solo), Social Science in China (Zhong Guo She Hui Ke Xue in Chinese《中国社会科学》), 2016, Issue 4, pp. 53-70. (Top 1 among all Chinese journals on social sciences, (CNKI) Impact Factor: 4.07)

7. “History of British Tax Reform and Implications to China", (with Wenchun Zhang), International Tax in China (Guo Ji Shui Shou in Chinese《国际税收》), 2015, Issue 9, pp. 62-66.

 6. “The Assessment of Production Efficiency Loss Caused by VAT in China", (Solo), Social Science in China (Zhong Guo She Hui Ke Xue in Chinese《中国社会科学》), 2013, Issue 8, pp. 67-84. (Top 1 among all Chinese journals on social sciences, (CNKI) Impact Factor: 4.07) (Collected in Impact and Perspective of VAT Reform in China, 2016, Publishing House of Renmin University of China, Beijing, China.)

5. “Credit Constraint, Government Consumption, and Real Business Cycle in China", (with Yulin Zhang), Economic Research Journal (Jin Ji Yan Jiu in Chinese《经济研究》), 2010, Issue 12, pp. 48-56. (Top 1 among all Chinese journals in economics, (CNKI) Impact Factor: 6.294)

4. “Human Capital, Innovation, and Economic Growth", (Solo), Economic Research Journal (Jin Ji Yan Jiu in Chinese《经济研究》), 2006, Issue 10, pp. 18-29. (Top 1 among all Chinese journal in economics, (CNKI) Impact Factor: 6.294) (Collected in Investing in Health and Education for Economic Development in China, the World Scientific Publishing Co. Pte. Ltd, April, 2010)

3. “Downward Compatibility of Human Capital and its Implication for the Cross-Country Income Level Accounting", (solo), Economic Research Journal (Jin Ji Yan Jiu in Chinese《经济研究》), 2005, Issue 4, pp. 46-56. (Top 1 among all Chinese journal in economics, (CNKI) Impact Factor: 6.294)

2. “Structural Change and Economic Growth", (with Liutang Gong) Economics Quarterly Journal (Jin Ji Xue Ji Kan in Chinese《经济学（季刊）》), 2005, Issue 3, pp. 583-604. (Top 5 among all Chinese journal in economics, (CNKI) Impact Factor: 3.478)

1. “A Survey on Cross-country Income Difference Studies", (Solo), Economic Perspectives (Jin Ji Xue Dong Tai in Chinese《经济学动态》), 2005, Issue 5, pp. 95-98.

Public Lectures

 “Why does Tax Administration Increasingly Matter to Tax Reform in China? (为何税收征管在中国税制改革中的重要性日益凸显？)”, Global Lecture Series on Chinese Economy（全球中国经济大讲堂）, CNKI（中国知网）, 17th of June, 2021, Lecture Video:  https://k.cnki.net/CInfo/Index/14440.