ON THE TIMING AND EFFICIENCY OF CREATIVE DESTRUCTION

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