Working Paper: NBER ID: w14935
Authors: Marcela Eslava; John C. Haltiwanger; Adriana D. Kugler; Maurice Kugler
Abstract: We use plant output and input prices to decompose the profit margin into four parts: productivity, demand shocks, mark-ups and input costs. We find that each of these market fundamentals are important in explaining plant exit. We then use variation across sectors in tariff changes after the Colombian trade reform to assess whether the impact of market fundamentals on plant exit changed with increased international competition. We find that greater international competition magnifies the impact of productivity, and other market fundamentals, on plant exit. A dynamic simulation that compares the distribution of productivity with and without the trade reform shows that improvements in market selection from trade reform help to weed out the least productive plants and increase average productivity. In addition, we find that trade liberalization increases productivity of incumbent plants and improves the allocation of activity within industries.
Keywords: trade reforms; market selection; productivity; Colombia
JEL Codes: F43; L25; O47
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Enhanced survival of productive plants (Q16) | Increased average productivity within the sector (O49) |
| Trade liberalization (F13) | Improved market selection (D40) |
| Increased international competition (F69) | Magnified impact of productivity on plant exit (D29) |
| Trade liberalization (F13) | Enhanced survival of productive plants (Q16) |
| Lower tariffs (F19) | Increased marginal effect of productivity on exit (D29) |
| Higher productivity (O49) | Decreased likelihood of exit (J63) |
| Higher energy prices (Q41) | Increased probability of exit (C41) |
| Higher material prices (L74) | Increased probability of exit (C41) |