On the Ills of Adjustment

38 Pages Posted: 20 Jul 2000 Last revised: 23 Sep 2010

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: July 1995

Abstract

We analyze market impediments to the process of structural adjustment. We focus on incomplete-contract inefficiencies in the transactions between workers and firms that render the quasi-rents from 'specific' investment appropriable. During adjustment, the result is a depressed rate of creation of the new productive structure and excessive destruction of the old one, leading to an employment crisis. Moreover, appropriability weakens the incentives for extensive restructuring and results in a 'sclerotic' productive structure. An adequate managed- adjustment program combines vigorous creation incentives in the expanding sector with measures to support employment in the contracting one. In contrast, the common prescription of gradualism does not act as an effective 'synchronizer' of creation and destruction, for it can only reduce destruction by also reducing an already depressed creation rate.

Suggested Citation

Caballero, Ricardo J. and Hammour, Mohamad L., On the Ills of Adjustment (July 1995). NBER Working Paper No. w5198. Available at SSRN: https://ssrn.com/abstract=225261

Ricardo J. Caballero (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Mohamad L. Hammour

Ecole Normale Superieure (ENS) ( email )

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Ecole Normale Superieure
75014 Paris
France
+33 143 136 305 (Phone)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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