The "Fundamental Transformation" in Macroeconomics

14 Pages Posted: 3 Jun 1998 Last revised: 7 May 2000

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: February 1996

Abstract

When factors enter into joint-production, they typically develop a degree of specificity with respect to each other. It is well known that, when combined with contracting difficulties, specificity gives rise to a Williamsonian 'Fundamental Transformation' from an ex-ante competitive relationship to an ex-post bilateral monopoly. The macroeconomic consequences of widespread specificity are far-reaching. Specificity results in misallocation, underutilization, and unemployment of the economy's productive factors; it hampers growth by depressing the incentives to replace what is outdated and to fully utilize the economy's resources; it disrupts macroeconomic adjustment by inducing a wedge between timid creation and excessive destruction of the old system; and it exacerbates downturns by `elastifying' the cyclical response of inelastic factors.

Suggested Citation

Caballero, Ricardo J. and Hammour, Mohamad L., The "Fundamental Transformation" in Macroeconomics (February 1996). NBER Working Paper No. w5471. Available at SSRN: https://ssrn.com/abstract=3134

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 )

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United Kingdom

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