Using iterative experiments to uncover causal links between critical policy details and outcomes helps to optimize policy design. This paper studies a large-scale staged fiscal stimulus program conducted during the COVID-19 pandemic, in which a provincial government in China disbursed digital coupons to 8.4 million individual accounts in consecutive waves and updated the program design each time. We find that ruling out unproductive program features leads to a pattern of increasing treatment effects over the waves and that program design matters more than the size of the fiscal stimulus in boosting spending. Our results show that (i) general coupons with no constraints on where the vouchers can be redeemed are more effective than specialized coupons in stimulating consumption in the targeted sectors; (ii) coupon packets with fewer denominations and shorter redemption windows tend to be more effective; and (iii) low-income residents and non-local residents are equally or even more responsive to the coupon program than other groups. Our results illustrate that generating variations in iterative policy experiments, combined with a timely assessment of individuals’ responses to marginal incentives, optimizes program design.

We investigate how marginal corporate tax rate affects corporate policy changes in response to a regulatory credit crunch. With a surge in debt due to a fiscal stimulus after 2008, the Chinese government rolled out the “deleveraging” program in 2015 which, through tightening monetary policies, restricting credit flows, and regulating shadow banks, significantly increased firms’ cost of debt and the incentive to deleverage. With a difference-in-differences design, we find that high-tax-rate firms reduce leverage to a less extent than low-tax-rate firms after the initiation of the deleveraging program. This effect is stronger in non-state-owned firms and firms with less non-debt tax shields. More importantly, through retaining more debt, high-tax-rate firms reduce dividend and switch to equity financing to a less extent, and also cut less investments in fixed assets, R&D and human capital. We conclude that tax constitutes an important factor in shaping the micro-economic consequences of a credit crunch.

We study the causes and consequences of growth in shadow banking by examining the Chinese banks’ issuance of Wealth Management Products (WMPs), which are short-maturity off-balance-sheet substitutes for deposits. Using branching overlap data, we instrument deposit availability with banks’ exposure to competition from a large state-owned bank, which substantially increased loan supply to support the fiscal stimulus during the Global Financial Crisis and competed more aggressively for deposits thereafter. We show that deposit market competition has a causal effect on smaller banks’ reliance on shadow banking: exposed banks increased the issuance of WMPs sharply, creating rollover risk for these banks.