1993 Reports

The Economics of Adjustment

Caplin, Andrew; Leahy, John

"As consumer tastes and production techniques evolve over time, the economy
must adjust to the changing circumstances. It must reallocate its resources
away from less desirable goods and less productive technologies towards newly
desirable and productive ones. The economics of adjustment takes as its subject
matter the analysis of the manner in which these changes occur. It studies how
individual economic agents decide to reallocate resources in response to economic
disturbances and how markets aggregate these individual adjustment decisions.
The importance of the subject arises from the fact that matching resources to
their appropriate uses is a very difficult, costly and time-consuming process. As a
result it is possible that resources may remain misallocated for some time as the
process of adjustment works itself out.
In this paper we focus on the role of information in the adjustment process."