Resource Reallocation, Productivity Dynamics, and Business Cycles

Abstract

This dissertation explores the interactions between resource reallocation, productivity dynamics and business cycles. A theory that combines two driving forces for resource reallocation, learning and creative destruction, is presented to reconcile several empirical findings of gross job flows. The theory suggests a scarring effect, in addition to the conventional Schumpeterian cleansing effect, of recessions on the allocation efficiency of resources. I argue that while recessions kill off some of the least productive businesses, they also impede the development of potentially good businesses -- the ones that might have proven to be efficient in the future are cleared out and lose the opportunity to realize their potential. Calibrations of the model using US manufacturing job flows suggest that the scarring effect is likely to dominate the cleansing effect and account for the observed pro-cyclical average productivity.