The price of capital goods, investment and labour: Micro‐evidence from a trade liberalization

Abstract In this paper, we show that a reduction in capital goods prices induced by trade policies can stimulate both investment and labour. 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 labour decision. Firms that see a larger decline in the input tariff for capital goods increase investment and labour for production, as well as their labour 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.