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

  • Keiichiro Kobayashi

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.

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Paper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number 04037.

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Length: 40 pages
Date of creation: Dec 2004
Date of revision:
Handle: RePEc:eti:dpaper:04037
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  1. Lamont, Owen, 1995. "Corporate-Debt Overhang and Macroeconomic Expectations," American Economic Review, American Economic Association, vol. 85(5), pages 1106-17, December.
  2. Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Accounting for the Great Depression," American Economic Review, American Economic Association, vol. 92(2), pages 22-27, May.
  3. Gary S. Murphy Becker & Kevin M., 1992. "The Division of Labor, Coordination Costs, and Knowledge," University of Chicago - George G. Stigler Center for Study of Economy and State 79, Chicago - Center for Study of Economy and State.
  4. Harold L. Cole & Lee E. Ohanian, 2004. "New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis," Journal of Political Economy, University of Chicago Press, vol. 112(4), pages 779-816, August.
  5. Lee E. Ohanian, 2002. "Why did productivity fall so much during the Great Depression?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr.
  6. Timothy J. Kehoe & Edward C. Prescott, 2002. "Great Depressions of the Twentieth Century," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(1), pages 1-18, January.
  7. Kobayashi, Keiichiro, 2007. "Payment Uncertainty And The Productivity Slowdown," Macroeconomic Dynamics, Cambridge University Press, vol. 11(02), pages 231-248, April.
  8. Keiichiro Kobayashi & Masaru Inaba, 2006. "Business cycle accounting for the Japanese economy," 2006 Meeting Papers 313, Society for Economic Dynamics.
  9. Kim, Sunwoong, 1989. "Labor Specialization and the Extent of the Market," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 692-705, June.
  10. Nobuhiro Kiyotaki & John Moore, 1997. "Credit Chains," ESE Discussion Papers 118, Edinburgh School of Economics, University of Edinburgh.
  11. Blanchard, O & Kremer, M, 1996. "Disorganization," Working papers 96-30, Massachusetts Institute of Technology (MIT), Department of Economics.
  12. 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).
  13. Basu, S., 1993. "Intermediate Goods and Business Cycles: Implications for Productivity and Welfare," Papers 93-23, Michigan - Center for Research on Economic & Social Theory.
  14. 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.
  15. Kobayashi, Keiichiro & Inaba, Masaru, 2005. "Debt disorganization in Japan," Japan and the World Economy, Elsevier, vol. 17(2), pages 151-169, April.
  16. 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, issue Win, pages 2-24.
  17. 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, vol. 92(2), pages 28-32, May.
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