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Payment Uncertainty and the Productivity Slowdown

  • Keiichiro Kobayashi

This 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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Paper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number 04029.

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Length: 21 pages
Date of creation: Sep 2004
Date of revision:
Handle: RePEc:eti:dpaper:04029
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  1. Lee E. Ohanian, 2002. "Why did productivity fall so much during the Great Depression?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr.
  2. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2003. "Accounting for the Great Depression," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 2-8.
  3. Lamont, Owen, 1995. "Corporate-Debt Overhang and Macroeconomic Expectations," American Economic Review, American Economic Association, vol. 85(5), pages 1106-17, December.
  4. Dale W. Jorgenson & Kazuyuki Motohashi, 2003. "Economic Growth of Japan and the United States in the Information Age," Discussion papers 03015, Research Institute of Economy, Trade and Industry (RIETI).
  5. Blanchard, O & Kremer, M, 1996. "Disorganization," Working papers 96-30, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Accounting for the Great Depression (technical appendix)," Working Papers 619, Federal Reserve Bank of Minneapolis.
  7. Kobayashi, Keiichiro & Inaba, Masaru, 2005. "Debt disorganization in Japan," Japan and the World Economy, Elsevier, vol. 17(2), pages 151-169, April.
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