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Scarring Recessions and Credit Constraints: Evidence from Colombian Firm Dynamics

  • Marcela Eslava


  • Arturo Galindo


  • Marc Hofstetter


  • Alejandro Izquierdo


Using a rich dataset of Colombian manufacturing establishments between 1995 and 2004, we illustrate potential scarring effects of recessions operating through credit constraints. In contrast with the view that recessions are times of cleansing, we find that financially constrained businesses might be forced to exit the market during recessions even if they are highly productive. For instance, during recessions, an establishment with TFP at the lowest 10th percentile but not facing credit constraints has the same exit probability as a constrained plant with TFP at least as high as the 39th percentile. The gap is much smaller during expansions. The contribution of the paper is threefold. First, it evaluates the role played by credit constraints in explaining firm dynamics throughout the business cycle, a phenomenon the literature has dealt with mostly from a theoretical standpoint. Second, it sheds light on the implied long-run consequences of exits induced by lack of credit on efficiency. Finally, it is the only study we know of providing direct evidence to judge the empirical merits of proposed micro foundations behind the long-run consequences of crises.

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Paper provided by UNIVERSIDAD DE LOS ANDES-CEDE in its series DOCUMENTOS CEDE with number 007711.

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Length: 43
Date of creation: 31 Aug 2010
Date of revision:
Handle: RePEc:col:000089:007711
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  1. Marcela Eslava & John Haltiwanger & Adriana Kugler & Maurice Kugler, 2004. "The effects of structural reforms on productivity and profitability enhancing reallocation: Evidence from Colombia," Economics Working Papers 763, Department of Economics and Business, Universitat Pompeu Fabra.
  2. Foster, Lucia & Haltiwanger, John C. & Syverson, Chad, 2005. "Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability?," IZA Discussion Papers 1705, Institute for the Study of Labor (IZA).
  3. repec:oup:qjecon:v:109:y:1994:i:2:p:309-40 is not listed on IDEAS
  4. Marcela Eslava & John Haltiwanger & Adriana Kugler & Maurice Kugler, 2005. "Factor Adjustments After Deregulation: Panel Evidence from Colombian Plants," NBER Working Papers 11656, National Bureau of Economic Research, Inc.
  5. Bloom, Nicholas & Draca, Mirko & Van Reenen, John, 2011. "Trade induced technical change? The impact of Chinese imports on innovation, IT and productivity," CEPR Discussion Papers 8236, C.E.P.R. Discussion Papers.
  6. Gibson,J.K. & Harris,R.I.D., 1996. "Trade Liberalisation and Plant Exit in New Zealand Manufacturing," Papers 66, Portsmouth University - Department of Economics.
  7. Guillermo A. Calvo & Alejandro Izquierdo & Ernesto Talvi, 2006. "Phoenix Miracles in Emerging Markets: Recovering without Credit from Systemic Financial Crises," Research Department Publications 4474, Inter-American Development Bank, Research Department.
  8. Laurence Ball & Nicol�s De Roux & Marc Hofstetter, 2011. "Unemployment in Latin America and the Caribbean," Economics Working Paper Archive 582, The Johns Hopkins University,Department of Economics.
  9. Jen Baggs, 2005. "Firm survival and exit in response to trade liberalization," Canadian Journal of Economics, Canadian Economics Association, vol. 38(4), pages 1364-1383, November.
  10. Chang-Tai Hsieh & Jonathan A. Parker, 2007. "Taxes and Growth in a Financially Underdevelopped Country: Evidence from the Chilean Investment Boom," ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION, ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION, August.
  11. Abdul Abiad & Petya Koeva Brooks & Irina Tytell & Daniel Leigh & Ravi Balakrishnan, 2009. "What’s the Damage? Medium-term Output Dynamics After Banking Crises," IMF Working Papers 09/245, International Monetary Fund.
  12. Matias Braun & Borja Larrain, 2004. "Finance and the Business Cycle: International, Inter-industry Evidence," Finance 0403001, EconWPA.
  13. Valerie Cerra & Sweta Chaman Saxena, 2008. "Growth Dynamics: The Myth of Economic Recovery," American Economic Review, American Economic Association, vol. 98(1), pages 439-57, March.
  14. Guillermo A. Calvo & Alejandro Izquierdo & Luis Fernando Mejía, 2008. "Systemic Sudden Stops: The Relevance of Balance-Sheet Effects and Financial Integration," IDB Publications (Working Papers) 6747, Inter-American Development Bank.
  15. John Haltiwanger & Russell Cooper, 1992. "The Aggregate Implications Of Machine Replacement: Theory And Evidence," Working Papers 92-12, Center for Economic Studies, U.S. Census Bureau.
  16. Min Ouyang, 2005. "The Scarring Effect of Recessions," Working Papers 050609, University of California-Irvine, Department of Economics.
  17. Barlevy, Gadi, 2003. "Credit market frictions and the allocation of resources over the business cycle," Journal of Monetary Economics, Elsevier, vol. 50(8), pages 1795-1818, November.
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