In this paper, we build a model of the transition following large-scale economic reforms that predicts both a substantial drop in output and a prolonged pause in physical investment as the initial phase of the optimal transition following the reform. We model reform as a change in policy which induces agents to close existing enterprises using old technologies of production and to open up new enterprises adopting new technologies of production. The central idea of our paper is that it is costly to close old enterprises and open new enterprises because, in doing so, information capital built up about old enterprises is lost and time must pass before information capital about new enterprises can be acquired. Thus, an acceleration of the pace of industry evolution leads in the short run to a net loss of information capital, a drop in productivity, a recession, and a fall in physical investment. We calibrate our model of industry evolution, information capital, and transition to match micro data on industry evolution in the United States and macro data from the United States, Japan, and the former communist countries of Europe. We find that the loss of information capital that accompanies a major acceleration in the pace of industry evolution in an economy leads initially to a decade of recession and a five year pause in physical investment before the benefits of reform are realized.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
file. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number
162.
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)
Boyan Jovanovic & Peter L. Rousseau, 2005.
"General Purpose Technologies,"
NBER Working Papers
11093, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Other versions: