On the Ills of Adjustment

Ricardo Caballero () and Mohamad L. Hammour

No 5198, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: E10 F00 (search for similar items in EconPapers)
Date: 1995-07
Note: EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published as Journal of Development Economics, vol. 51, no. 1, October 1996 pp. 161

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Journal Article: On the ills of adjustment (1996)
Working Paper: On the Ills of Adjustment (1995)
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