The Cost of Recession Revisited: A Reverse-Liquidationist View
38 Pages Posted: 23 Jan 2000
Date Written: October 1999
The observation that the 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 with 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.
KEY WORDS: Business Cycle, Unemployment, Inefficient Separations, Job Creation and Destruction, Financial Constraints, Depressed Restructuring, Heterogeneity, Liquidation, Sclerosis
JEL Classification: E24, E32, E44, G3
Suggested Citation: Suggested Citation