Factor Adjustment After Deregulation: Panel Evidence from Colombia Plants

Marcela Eslava, John C. Haltiwanger, Adriana Kugler, and Maurice Kugler , Review of Economics and Statistics 92(2) , 378-391 , May 2010.

We analyze nonlinear adjustments of capital and labor using plant data from the Colombian Annual Manufacturing Survey, allowing for interdependence in adjustments of the two factors. We find nonlinear employment and capital adjustments. We also find that capital shortages reduce hiring, and labor surpluses reduce capital shedding. Moreover, we find that job destruction and capital formation increased after factor market deregulation in Colombia. Finally, we find that completely eliminating frictions in factor adjustment would yield a substantial increase in aggregate productivity through improved allocative efficiency, but that the actual impact of the Colombian deregulation on productivity was modest.

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