The Cost of Recessions Revisited: a Reverse-Liquidationist View

40 Pages Posted: 25 Feb 2000 Last revised: 6 Feb 2022

See all articles by Ricardo J. Caballero

Ricardo J. Caballero

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Mohamad L. Hammour

Ecole Normale Superieure (ENS); Centre for Economic Policy Research (CEPR)

Date Written: September 1999

Abstract

The observation that liquidations are concentrated in recessions has long been the subject of controversy. One view holds that liquidations are beneficial in that they result in increased restructuring. Another view holds that liquidations are privately inefficient and essentially wasteful. This paper proposes an alternative perspective. Based on a combination of theory and empirical evidence on gross job flows and on financial and labor market rents, we find that, cumulatively, recessions result in reduced restructuring, and that this is likely to be socially costly once we consider inefficiencies on both the creation and destruction margins.

Suggested Citation

Caballero, Ricardo J. and Hammour, Mohamad L., The Cost of Recessions Revisited: a Reverse-Liquidationist View (September 1999). NBER Working Paper No. w7355, Available at SSRN: https://ssrn.com/abstract=194672

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Mohamad L. Hammour

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