On the Timing and Efficiency of Creative Destruction

Abstract

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.