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Government Financial Institutions and Capital Allocation Efficiency in Japan

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  • Masami Imai

    (Department of Economics, Wesleyan University)

Abstract

This paper examines the impact of government loans on capital allocation efficiency with Japan’s prefecture-level data from 1975-2005. We address the endogeneity of government loans by using the exogenous variation in the share of government loans that is correlated with the intensity of political support for the Liberal Democratic Party (LDP), the dominant political party. We find that the share of government loans is strongly and negatively correlated with the quality of capital allocation, as measured by the elasticity of industry investment to valueadded, Wurgler’s η, and that this negative correlation is more pronounced in declining industries than growing industries. Moreover, the results show that the share of government loans is negatively correlated with total factor productivity growth but positively correlated with investment-to-output ratio. Taken as a whole, Japan’s government financial institutions might have propped up declining industries in the LDP strongholds with overall negative effects on capital allocation efficiency and technical progress.

Suggested Citation

  • Masami Imai, 2018. "Government Financial Institutions and Capital Allocation Efficiency in Japan," Wesleyan Economics Working Papers 2018-002, Wesleyan University, Department of Economics, revised Mar 2020.
  • Handle: RePEc:wes:weswpa:2018-002
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