Tax Incentives, Factor Allocation and Within-Firm Pay Gap: Evidence from a Quasi-Natural Experiment in China

ABSTRACT

This paper investigates the effect of China’s accelerated depreciation policy on within-firm pay gap. We exploit a firm-level panel data from China’s A-share listed companies and estimate the policy effects by constructing a difference-in-differences model. Results show that the accelerated depreciation policy significantly increases the within-firm pay gap of firms of pilot industries than those of non-pilot industries, and this finding continues to hold after accounting for other contemporaneous shocks and is robust to a battery of robustness checks. Our mechanism tests demonstrate that, the rank-and-file employees replaced by the use of capital rather than executives, dominates the positive nexus between within-firm pay gap and accelerated depreciation policy. This effect is more pronounced for firms with higher tax burden, stronger financing constraint and higher capital intensity. We also find that China’s accelerated depreciation policy improves overall capital allocation efficiency and labor allocation efficiency. Our findings provide a deep understanding of the link between tax incentives and within-firm pay gap, especially from the perspective of factor allocation.

KEYWORDS:

• Accelerated depreciation policy
• within-firm pay gap
• factor allocation
• difference-in-difference

JEL:

• H32
• M52

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. The six industries include: (i) bio-pharmaceutical industry, (ii) special equipment, (iii) railways, ships, aerospace, and transport equipment, (iv) computer, communications, and electronic equipment, (v) information transmission, and (vi) software and information technology services.

2. Different from other countries, the proportion of stock potions for executives in China is quite low. For example, there is only less than 5% listed companies have stock options in our sample, so the stock options is not for consideration in the calculation of executive compensation in this paper.

3. The introduce of the accelerated depreciation policy in 2019 expanding the scope of pilot industries to all manufacturing industries after 2019. The presence of manufacturing enterprises in the sample firms may contribute to a significant disparity between the pilot firms and non-pilot firms. Moreover, it is evident that there exists a disparity in the magnitude of fixed assets between manufacturing and non-manufacturing firms, hence potentially impacting the precision of the difference-in-differences estimation.

4. Notably, the industries controlled in the fixed effect are the major industries apart from the pilot industries so as to avoid the multicollinearity.

5. In order to fully ensure the impact of the internationalization, we also consider the firm as a $\mathit{FOE}$ when it is a Sino-foreign joint venture.

6. Actually, the capital intensity here is the same as capital-labor ratio previously.

Additional information

Funding

We thank the support provided by the National Natural Science Foundation of China (NSFC) [Grant No. 71573035], the National Social Science Foundation of China (NSSFC) [Grant No. 22AZD040] and the Guangdong Philosophy and Social Science 2021 Annual Project (GD21YYJ02).