Introduction

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 more 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 chapter we focus on the role of information in the adjustment process. In most situations agents make their adjustment decisions under great uncertainty. They need to know the best use for their resources, the best location to adjust to, and the best means of adjustment. They face difficulties, however, in deciding exactly which uses, locations, and means are the best. At each stage of this decision making process they need to gather information in order to make their decisions effectively. Faced with such uncertainty, it is natural that agents will make use of all sources of information at their disposal, including the observed behaviour of others who are in similar situations and contemplating similar adjustment decisions.