Table of contents for Specificity and the macroeconomics of restructuring / Ricardo J. Caballero.

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Contents
Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xii
I Introduction 1
1 Introduction 3
1.1 Restructuring and Institutions . . . . . . . . . . . . . . . . . . 3
1.2 Specificity: A Common Thread . . . . . . . . . . . . . . . . . 6
1.3 Macroeconomic Implications and Outline . . . . . . . . . . . . 8
1.4 References and Suggested Readings . . . . . . . . . . . . . . . 16
2 The Empirics of Aggregate Restructuring 21
2.1 Restructuring and Gross Flows . . . . . . . . . . . . . . . . . 22
2.2 International Evidence on Gross Flows . . . . . . . . . . . . . 24
2.3 Gross Flows and Productivity . . . . . . . . . . . . . . . . . . 26
2.4 Gross Flows and Restructuring over the Business Cycle . . . . 2
2.4.1 The Rise of Liquidations During Recessions . . . . . . 29
2.4.2 Depressed Restructuring During Recessions . . . . . . 30
2.5 Institutional Impediments to Restructuring . . . . . . . . . . . 41
2.5.1 Labor Market Impediments and Restructuring . . . . . 41
2.5.2 Financial Market Impediments and Restructuring . . . 47
2.5.3 Trade Restrictions and Restructuring . . . . . . . . . . 52
2.5.4 Deregulation and Restructuring . . . . . . . . . . . . . 55
2.6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
2.7 References and Suggested Readings . . . . . . . . . . . . . . . 58
II The Basics 69
3 The Fundamental Transformation¿ 71
3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
3.2 Basic (Static-Single-Margin) Model . . . . . . . . . . . . . . . 75
3.2.1 Production Structure . . . . . . . . . . . . . . . . . . . 76
3.2.2 Specificity and Incomplete Contracts . . . . . . . . . . 77
3.2.3 Factor Rewards . . . . . . . . . . . . . . . . . . . . . . 80
3.2.4 Free Entry . . . . . . . . . . . . . . . . . . . . . . . . . 82
3.3 Short-Run Macroeconomic Implications . . . . . . . . . . . . . 84
3.3.1 Rationing, Unemployment and Segmentation . . . . . . 84
3.3.2 Flat Effective Labor Supply¿ . . . . . . . . . . . . . . 87
3.3.3 Bottlenecks During Booms and High q . . . . . . . . . 88
3.3.4 Asymmetric Business Cycles . . . . . . . . . . . . . . . 92
3.4 The Destruction Margin . . . . . . . . . . . . . . . . . . . . . 93
3.4.1 Sclerosis and Excessive Destruction . . . . . . . . . . . 94
3.4.2 Privately Ineffi cient Separations . . . . . . . . . . . . . 98
3.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
3.6 References and Suggested Readings . . . . . . . . . . . . . . . 104
4 Effi cient Restructuring 115
4.1 Basic (Dynamic) Model of Restructuring . . . . . . . . . . . . 116
4.1.1 Production Units: Distribution and Flows . . . . . . . 116
4.1.2 Decisions and Equilibrium . . . . . . . . . . . . . . . . 119
4.1.3 Steady State . . . . . . . . . . . . . . . . . . . . . . . . 122
4.1.4 Margins of Adjustment over the Business Cycle . . . . 125
4.2 An Opportunity Cost View of Recessions: Effi cient Search . . 130
4.2.1 Search Costs . . . . . . . . . . . . . . . . . . . . . . . . 132
4.2.2 Decisions and Bargaining . . . . . . . . . . . . . . . . . 133
4.2.3 Effi cient Equilibrium . . . . . . . . . . . . . . . . . . . 137
4.2.4 Steady State . . . . . . . . . . . . . . . . . . . . . . . . 140
4.2.5 Synchronized Flows . . . . . . . . . . . . . . . . . . . . 142
4.2.6 Determining the Path of Wages . . . . . . . . . . . . . 144
4.3 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148
4.4 Appendix - Numerical Computations . . . . . . . . . . . . . . 148
4.4.1 Numerical Calculations for the Basic Dynamic Model of
Restructuring with Convex Creation Costs . . . . . . . 149
4.4.2 Numerical Calculations for the Opportunity Cost View
of Recessions Model . . . . . . . . . . . . . . . . . . . 150
4.5 References and Suggested Readings . . . . . . . . . . . . . . . 152
III Ineffi cient Restructuring 163
5 Ineffi cient Restructuring 165
5.1 Search Frictions and Bargaining . . . . . . . . . . . . . . . . . 165
5.2 Decoupled Restructuring . . . . . . . . . . . . . . . . . . . . . 169
5.2.1 Covert and Overt Rigidity . . . . . . . . . . . . . . . . 172
5.3 The Slope of the Beveridge Curve . . . . . . . . . . . . . . . . 174
5.3.1 Effi cient Unemployment . . . . . . . . . . . . . . . . . 175
5.3.2 Ineffi cient Unemployment . . . . . . . . . . . . . . . . 176
5.4 Average Distortions in Restructuring and Unemployment . . . 179
5.4.1 Weak and Strong Insiders . . . . . . . . . . . . . . . . 179
5.4.2 Unemployment and Sclerosis . . . . . . . . . . . . . . . 182
5.5 Economic Policy . . . . . . . . . . . . . . . . . . . . . . . . . 190
5.5.1 Production and Creation Incentives . . . . . . . . . . . 191
5.5.2 Expansionary Policy, Liquidationism, and Accelerationism196
5.5.3 Optimal Dynamic Policy . . . . . . . . . . . . . . . . . 200
5.6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203
5.7 Appendix - Numerical Computations . . . . . . . . . . . . . . 204
5.7.1 Numerical Calculations for Section 5.1 . . . . . . . . . 205
5.7.2 Numerical Calculations for Section 5.2 . . . . . . . . . 205
5.7.3 Numerical Calculations for Section 5.3 . . . . . . . . . 205
5.7.4 Numerical Calculations for Section 5.4 . . . . . . . . . 206
5.7.5 Numerical Calculations for Section 5.5 . . . . . . . . . 206
5.8 References and Suggested Readings . . . . . . . . . . . . . . . 207
6 Financial Markets Specificity and Restructuring 219
6.1 A Static Model . . . . . . . . . . . . . . . . . . . . . . . . . . 221
6.1.1 Effi cient Equilibrium . . . . . . . . . . . . . . . . . . . 223
6.1.2 Incomplete-Contracts Equilibrium . . . . . . . . . . . . 224
6.1.3 Equilibrium Characterization . . . . . . . . . . . . . . 229
6.2 A Dynamic Model . . . . . . . . . . . . . . . . . . . . . . . . 233
6.2.1 General Structure . . . . . . . . . . . . . . . . . . . . . 233
6.2.2 Contracting Failures in the Labor and Financial Markets 240
6.2.3 Creation and Continuation . . . . . . . . . . . . . . . . 244
6.2.4 Aggregate Dynamics and Equilibrium . . . . . . . . . . 251
6.3 Ineffi cient Restructuring . . . . . . . . . . . . . . . . . . . . . 256
6.3.1 Parameter Choice . . . . . . . . . . . . . . . . . . . . . 256
6.3.2 Structural Unemployment, Sclerosis and Scrambling . . 260
6.3.3 Depressed Restructuring following Recessions . . . . . 265
6.3.4 Decomposing Depressed Restructuring and its Costs . . 271
6.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277
6.5 Appendix: Parameter Restrictions . . . . . . . . . . . . . . . . 278
6.6 Appendix: Division of Specific Quasi-Rents . . . . . . . . . . . 280
6.7 Appendix: Exit Profitability Condition (Steady State) . . . . 282
6.8 Appendix: Distributional Dynamics . . . . . . . . . . . . . . . 283
6.9 Appendix: Model Calibration and Simulation Method . . . . . 285
6.9.1 General Features of the Economy . . . . . . . . . . . . 285
6.9.2 Factor Market Rents . . . . . . . . . . . . . . . . . . . 286
6.9.3 Unemployment and Gross Flows . . . . . . . . . . . . . 288
6.10 Appendix: Detailed Iterative Procedure . . . . . . . . . . . . . 289
6.11 References and Suggested Readings . . . . . . . . . . . . . . . 292
7 Application: Structural Adjustment 301
7.1 Appropriability in a Simple Model of Adjustment . . . . . . . 303
7.1.1 A Simple Linear Model of Adjustment . . . . . . . . . 304
7.1.2 Sclerosis and Unbalanced Restructuring . . . . . . . . . 311
7.1.3 Covert Wage Rigidity Revisited . . . . . . . . . . . . . 314
7.1.4 Productivity Cleansing During Adjustment . . . . . . . 317
7.1.5 Unemployment, the Informal Sector and Segmented La-
bor Markets . . . . . . . . . . . . . . . . . . . . . . . . 320
7.2 Gradualism . . . . . . . . . . . . . . . . . . . . . . . . . . . . 323
7.2.1 Gradualism with Sluggish Creation . . . . . . . . . . . 326
7.2.2 Gradualism with Excessive Destruction . . . . . . . . . 329
7.3 Managed Adjustment . . . . . . . . . . . . . . . . . . . . . . . 338
7.3.1 Introducing Frictional Unemployment . . . . . . . . . . 338
7.3.2 Distorted Margins and Policy . . . . . . . . . . . . . . 340
7.3.3 Optimal Policies . . . . . . . . . . . . . . . . . . . . . 342
7.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 344
7.5 Appendix: Wage Differentials . . . . . . . . . . . . . . . . . . 344
7.6 Appendix: Welfare Calculations . . . . . . . . . . . . . . . . 346
7.7 Appendix: ¿Overt'Wage Rigidity . . . . . . . . . . . . . . . . 349
7.8 Appendix: Adjustment in an Ineffi cient Economy . . . . . . . 350
7.9 Appendix: Parameters . . . . . . . . . . . . . . . . . . . . . . 353
7.10 References and Suggested Readings . . . . . . . . . . . . . . . 353
IV Institutional and Technological Evolution 361
8 Institutions, Interest Groups, and the Response of Markets
and Technology 363
8.1 The Politics of Capital and Labor . . . . . . . . . . . . . . . . 365
8.1.1 Institutional Specificity . . . . . . . . . . . . . . . . . . 366
8.1.2 Interest Groups . . . . . . . . . . . . . . . . . . . . . . 366
8.1.3 A Balancing Act . . . . . . . . . . . . . . . . . . . . . 367
8.1.4 Institutional Rigidity . . . . . . . . . . . . . . . . . . . 371
8.2 The Response of Technology . . . . . . . . . . . . . . . . . . . 374
8.2.1 Technological Menu . . . . . . . . . . . . . . . . . . . . 375
8.2.2 Technology Selection in the Ineffi cient Economy . . . . 377
8.2.3 Balanced-Specificity and Net Appropriation Regions . . 380
8.2.4 Distorted Capital/Labor Ratio . . . . . . . . . . . . . . 382
8.2.5 Market Segmentation Re-emerges . . . . . . . . . . . . 387
8.2.6 More Excess Substitution: Capital Supply and Sclerosis
Channels . . . . . . . . . . . . . . . . . . . . . . . . . . 389
8.2.7 Deregulation and Globalization . . . . . . . . . . . . . 392
8.3 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 393
8.4 Appendix: Simulation Parameters . . . . . . . . . . . . . . . . 394
8.5 References and Suggested Readings . . . . . . . . . . . . . . . 394
9 Application: Three Decades of Unemployment inWestern Eu-
rope 405
9.1 The French Experience . . . . . . . . . . . . . . . . . . . . . . 412
9.1.1 French Macroeconomic Performance . . . . . . . . . . . 412
9.1.2 The Evolution of Capital-Labor Relations . . . . . . . 415
9.2 Appropriability, Putty-Clay Technology and Factor Substitution 418
9.3 Technological Dimensions of Appropriability . . . . . . . . . . 428
9.3.1 Calibration . . . . . . . . . . . . . . . . . . . . . . . . 428
9.3.2 Appropriation in the Long Run . . . . . . . . . . . . . 433
9.3.3 Putty-Clay Technology and Factor Substitution: Dy-
namic Response . . . . . . . . . . . . . . . . . . . . . . 444
9.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 449
9.5 Appendix: Wage Payments . . . . . . . . . . . . . . . . . . . . 450
9.6 References and Suggested Readings . . . . . . . . . . . . . . . 451
V Conclusion 457
10 Final Remarks 459
Index

Library of Congress Subject Headings for this publication:

Technological innovations -- Economic aspects -- Mathematical models.
Creative destruction -- Mathematical models.
Asset specificity -- Mathematical models.
Resource allocation -- Mathematical models.