NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The "Fundamental Transformation" in Macroeconomics

Ricardo J. Caballero, Mohamad L. Hammour

NBER Working Paper No. 5471
Issued in February 1996
NBER Program(s):   EFG

When factors enter into joint-production, they typically develop a degree of specificity with respect to each other. It is well known that, when combined with contracting difficulties, specificity gives rise to a Williamsonian 'Fundamental Transformation' from an ex-ante competitive relationship to an ex-post bilateral monopoly. The macroeconomic consequences of widespread specificity are far-reaching. Specificity results in misallocation, underutilization, and unemployment of the economy's productive factors; it hampers growth by depressing the incentives to replace what is outdated and to fully utilize the economy's resources; it disrupts macroeconomic adjustment by inducing a wedge between timid creation and excessive destruction of the old system; and it exacerbates downturns by `elastifying' the cyclical response of inelastic factors.

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Document Object Identifier (DOI): 10.3386/w5471

Published: American Economic Review, papers and proceedings, 86(2) may 1996

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