Does Natural Selection Mechanism Still Work in Severe Recessions? -- ]Examination of the Japanese Economy in the 1990s ---
This paper investigates whether or not the natural selection mechanism (NSM) of economic Darwinism works in severe recessions. Although standard firm models imply the importance of NSM in an economy by showing firm's rational behavior on entry, surviving, and exit leads to macro-level TFP growth, there is almost no evidence to demonstrate NSM works even in severe recessions and depressions. Based on micro data of the Basic Survey of Japanese Business Structure and Activities (BSJBSA) by Ministry of Economy, Trade and Industry, we construct a comprehensive firm-level panel dataset for Japan from 1994 to 1998, especially designed for the analysis of a firm's entry, survival, and exit and its relationship with TFP. Empirical results show that efficient firms in terms of TFP quit while inefficient ones survived in the banking-crisis period of 1996-1997. Besides, this phenomenon is mainly observed for new entrants and contributes substantially to a fall in macro TFP after 1996. These facts strongly suggest malfunctioning of NSM in severe recessions.
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