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The Price of Capital Goods, Investment, and Labor: Micro-Evidence from a Trade Liberalization

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  • Sergii Meleshchuk
  • Yannick Timmer

Abstract

In this paper, we show that a reduction in capital goods prices induced by trade policies can stimulate both investment and labor. We exploit a quasi-natural experiment in the form of a trade reform in Colombia to study how firms with differential exposure to reductions in capital goods tariffs react in terms of their investment and labor decision. Firms that see a larger decline in the input tariff for capital goods increase investment and labor for production, as well as their labor share. Reductions in input tariffs are passed through to input prices for all goods. However, only lower prices for capital, not for other goods, translate into more investment and employment of production workers.

Suggested Citation

  • Sergii Meleshchuk & Yannick Timmer, 2024. "The Price of Capital Goods, Investment, and Labor: Micro-Evidence from a Trade Liberalization," CESifo Working Paper Series 11285, CESifo.
    • Handle: RePEc:ces:ceswps:_11285
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    More about this item

    Keywords

    investment; tariffs; capital goods; price of capital; employment; trade reform; Colombia;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade

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