ON THE ILLS OF ADJUSTMENT

We analyze market impediments to the process of structural adjustment. We focus on incomplete contract inefficiencies in the transactions be tween workers and firms that render the quasi-rents from 'specific' in vestment appropriable. During adjustment, the result is a depressed ra te of creation of the new productive structure and excessive destructi on of the old one, leading to an employment crisis, Moreover, appropri ability weakens the incentives for extensive restructuring, and result s in a 'sclerotic' productive structure. An adequate managed adjustmen t program ought to combine vigorous creation incentives in the expandi ng sector with measures to support employment in the contracting one. In contrast, the common prescription of gradualism does not act as an effective 'synchronizer' of creation and destruction, for it can only reduce destruction by also reducing an already depressed creation rate .