The core mechanism that drives economic growth in modern market economies is massive microeconomic restructuring and factor reallocation—the Schumpeterian "creative destruction" by which new technologies replace the old. At the microeconomic level, restructuring is characterized by countless decisions to create and destroy production arrangements. The efficiency of these decisions depends in large part on the existence of sound institutions that provide a proper transactional environment. In this groundbreaking book, Ricardo Caballero proposes a unified framework to analyze and understand a wide variety of macroeconomic phenomena stemming from limitations, especially institutional, that hinder these adjustments.
Caballero argues that macroeconomic models need to be made more "structural" in a precise sense and can not be maintained on the assumption that decisions are fully flexible. What is needed, he proposes, is the notion of specificity—the idea that factors of production are not freely interchangeable. Many of the major macroeconomic developments of recent decades, he argues, fit naturally into this perspective, including the transition problems of Eastern Europe, the heavy weight of labor regulations in Western Europe, the emerging market crises of the 1990s, the prolonged expansion of the U.S. economy, and Japan's stagnation following the collapse of its real estate bubble.
After describing the basic arguments of the book and developing models to illustrate two different kinds of specificity (relationship specificity and technological specificity), Caballero analyzes a variety of aspects of inefficient restructuring and revisits perennial business cycle patterns such as the cyclical behavior of unemployment, investment, and wages. Finally, he looks at the endogenous response of political institutions and technology to opportunistic exploitation of relationship specificity. Economists working on macroeconomics, development, growth, labor, and productivity issues will find Caballero's conceptual framework applicable to phenomena in their fields.
"Caballero delivers a powerful analysis of the key role played by factor specificity in productive relationships, investment decisions, and macroeconomic performance. The analysis yields valuable and original insights into unemployment, job creation, productivity, and the institutional underpinnings of growth and development. The book is a major work and an impressive intellectual achievement."
—Steven J. Davis, William H. Abbott Professor of International Business and Economics, University of Chicago
"Caballero puts the modern theory of bargaining, turnover, and matching to work in a dazzling variety of interesting applications. This elegant book belongs in the library of every applied researcher in economics."
—Robert E. Hall, Hoover Institution and Department of Economics, Stanford University
"Caballero's book is a superb synthesis of recent empirical and theoretical literature on the role of restructuring and reallocation within and between firms for understanding economic fluctuation and growth. It is essential for scholars working on these issues, as well as for those seeking an entry to the debate."
—John Haltiwanger, Professor of Economics, University of Maryland