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On the Timing and Efficiency of Creative Destruction

Listed author(s):
  • Ricardo J. Caballero
  • Mohamad L. Hammour

We analyze the timing, pace, and efficiency of ongoing job reallocation that results from product and process innovation. There are strong reasons why an efficient economy ought to concentrate both job creation and destruction during recessions, when the opportunity cost of reallocation is lowest. Incomplete contracting between labor and capital can disrupt this synchronized pattern and decouple creation and destruction. Transactional difficulties also lead to technological "sclerosis," characterized by excessively slow renovation. Government incentives to production may alleviate high unemployment but exacerbate sclerosis. In contrast, creation incentives increase the pace of reallocation. An optimal combination of both policies restores economic efficiency.

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File URL: http://hdl.handle.net/10.2307/2946673
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Article provided by Oxford University Press in its journal The Quarterly Journal of Economics.

Volume (Year): 111 (1996)
Issue (Month): 3 ()
Pages: 805-852

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Handle: RePEc:oup:qjecon:v:111:y:1996:i:3:p:805-852.
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  1. Abraham, Katharine G & Katz, Lawrence F, 1986. "Cyclical Unemployment: Sectoral Shifts or Aggregate Disturbances?," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 507-522, June.
  2. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth through Creative Destruction," Econometrica, Econometric Society, vol. 60(2), pages 323-351, March.
  3. Oliver Jean Blanchard & Peter Diamond, 1989. "The Beveridge Curve," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 20(1), pages 1-76.
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