Reaction Mechanism
The reaction mechanism is thought to involve the formation of an enolate on the side of the ketone away from the chlorine atom. This enolate cyclizes to a cyclopropanone intermediate which is then attacked by the hydroxide nucleophile.
Usage of alkoxide anions such as sodium methoxide, instead of sodium hydroxide, yields the ring-contracted ester product.
Read more about this topic: Favorskii Rearrangement
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