Export-promotion under revenue constraints: The case of tariff-rebate on intermediate inputs in Pakistan

We develop a trade-theoretic model to determine the optimal level of rebate given to the exporting sector on tariffs paid on imported intermediate inputs, when the economy is distorted by an import-substituting bias in its trade policy and is subject to a revenue constraint. By simulating the model, we find that the level of rebate is positively related to both the own-price and the output-price elasticity of demand for intermediate inputs by the exporting sector and that it decreases as the value of the marginal cost for public funds increases.