Payment Uncertainty and the Productivity Slowdown
AbstractThis paper proposes a simple model that possibly explains the productivity slowdown observed in Japan during the 1990s. Under a forbearance policy by the government toward nonperforming loans, one keeping insolvent firms afloat, other economic agents become exposed to a higher risk of not being paid by their customers (payment uncertainty). It is shown that the payment uncertainty, working through the market mechanism, causes an endogenous decline in the number of firms that are involved in the production of one good. Resulting disruptions of the division of labor among firms lower macroeconomic productivity. The relevance of this model to Japan's lost decade and other depression episodes, such as the Great Depression in the United States, is discussed.
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Bibliographic InfoPaper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number 04029.
Length: 21 pages
Date of creation: Sep 2004
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