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Payment uncertainty, the division of labor, and productivity declines in great depressions

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  • Keiichiro Kobayashi

    (Research Institute of Economy, Trade and Industry)

Abstract

This paper proposes a simple model that formalizes a variant of Ohanian's (2001) conjecture explaining the productivity declines observed in the Great Depression. If a large payment shock like an asset-price collapse renders many firms insolvent, other economic agents become exposed to a higher risk of not being paid (payment uncertainty). The payment uncertainty causes endogenous disruptions of the division of labor among firms, thereby lowering macroeconomic productivity. The prediction of the model is that productivity correlates negatively with bankruptcies and positively with the cost share of intermediate inputs, which is consistent with the data from depression episodes. The model implies that the so-called failure of macroeconomic policy in the United States during the early 1930s, when a rash of bankruptcies occurred, could actually have been welfare enhancing, since the quick exit of insolvent agents can resolve payment uncertainty quickly. (Copyright: Elsevier)

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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 9 (2006)
Issue (Month): 4 (October)
Pages: 715-741

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Handle: RePEc:red:issued:05-50

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Keywords: Payment uncertainty; Productivity; Division of labor; Great depressions;

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References

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  1. Becker, Gary S & Murphy, Kevin M, 1992. "The Division of Labor, Coordination Costs, and Knowledge," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 107(4), pages 1137-60, November.
  2. Blanchard, Olivier & Kremer, Michael, 1997. "Disorganization," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 112(4), pages 1091-1126, November.
  3. Timothy J. Kehoe & Edward C. Prescott (), 2007. "Great depressions of the twentieth century," Monograph, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, number 2007gdott.
  4. Nobuhiro Kiyotaki & John Moore, 2004. "Credit Chains," ESE Discussion Papers, Edinburgh School of Economics, University of Edinburgh 118, Edinburgh School of Economics, University of Edinburgh.
  5. Lee E. Ohanian, 2002. "Why did productivity fall so much during the Great Depression?," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Spr.
  6. Dale W. Jorgenson & Kazuyuki Motohashi, 2003. "Economic Growth of Japan and the United States in the Information Age," Discussion papers, Research Institute of Economy, Trade and Industry (RIETI) 03015, Research Institute of Economy, Trade and Industry (RIETI).
  7. Timothy Kehoe & Edward Prescott, 2002. "Data Appendix to Great Depressions of the Twentieth Century," Technical Appendices, Review of Economic Dynamics kehoe02, Review of Economic Dynamics.
  8. Lamont, Owen, 1995. "Corporate-Debt Overhang and Macroeconomic Expectations," American Economic Review, American Economic Association, American Economic Association, vol. 85(5), pages 1106-17, December.
  9. Harold L. Cole & Lee E. Ohanian, 2001. "New Deal policies and the persistence of the Great Depression: a general equilibrium analysis," Working Papers, Federal Reserve Bank of Minneapolis 597, Federal Reserve Bank of Minneapolis.
  10. Harold L. Cole & Lee E. Ohanian, 2002. "The U.S. and U.K. Great Depressions Through the Lens of Neoclassical Growth Theory," American Economic Review, American Economic Association, American Economic Association, vol. 92(2), pages 28-32, May.
  11. Keiichiro Kobayashi, 2004. "Payment Uncertainty and the Productivity Slowdown," Discussion papers, Research Institute of Economy, Trade and Industry (RIETI) 04029, Research Institute of Economy, Trade and Industry (RIETI).
  12. Kobayashi, Keiichiro & Inaba, Masaru, 2005. "Debt disorganization in Japan," Japan and the World Economy, Elsevier, Elsevier, vol. 17(2), pages 151-169, April.
  13. Susanto Basu, 1994. "Intermediate Goods and Business Cycles: Implications for Productivity and Welfare," NBER Working Papers 4817, National Bureau of Economic Research, Inc.
  14. Kobayashi, Keiichiro & Inaba, Masaru, 2006. "Business cycle accounting for the Japanese economy," Japan and the World Economy, Elsevier, Elsevier, vol. 18(4), pages 418-440, December.
  15. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2003. "Accounting for the Great Depression," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Spr, pages 2-8.
  16. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Accounting for the Great Depression (technical appendix)," Working Papers, Federal Reserve Bank of Minneapolis 619, Federal Reserve Bank of Minneapolis.
  17. Harold L. Cole & Lee E. Ohanian, 1999. "The Great Depression in the United States from a neoclassical perspective," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Win, pages 2-24.
  18. Kim, Sunwoong, 1989. "Labor Specialization and the Extent of the Market," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 97(3), pages 692-705, June.
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Cited by:
  1. Juan Carlos Hatchondo & Leonardo Martinez & Horacio Sapriza, 2008. "Heterogeneous borrowers in quantitative models of sovereign default," Working Paper, Federal Reserve Bank of Richmond 07-01, Federal Reserve Bank of Richmond.
  2. Leonardo Martinez & Juan Carlos Hatchondo, 2009. "A model of credit risk without commitment," 2009 Meeting Papers, Society for Economic Dynamics 978, Society for Economic Dynamics.
  3. Hatchondo, Juan Carlos & Martinez, Leonardo, 2009. "Long-duration bonds and sovereign defaults," Journal of International Economics, Elsevier, Elsevier, vol. 79(1), pages 117-125, September.
  4. KOBAYASHI Keiichiro, 2009. "Asset-Price Collapse and Market Disruption - A model of financial crises -," Discussion papers, Research Institute of Economy, Trade and Industry (RIETI) 09045, Research Institute of Economy, Trade and Industry (RIETI).
  5. Akiyoshi, Fumio & Kobayashi, Keiichiro, 2010. "Banking crisis and productivity of borrowing firms: Evidence from Japan," Japan and the World Economy, Elsevier, Elsevier, vol. 22(3), pages 141-150, August.

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