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Zombie Lending, Labor Hoarding, and Local Industry Growth

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  • Kin Wai Cheung

    (Department of Economics, University of California, Davis)

  • Masami Imai

    (Department of Economics, Wesleyan University)

Abstract

After the bursting of real estate bubbles in 1991, Japanese banks continued lending to the construction and real estate sectors to conceal problem loans. We revisit Japan’s experience and propose a new mechanism via which banks’ loan-evergreening policy for these troubled sectors undermines allocative efficiency. Namely, banks’ support for the construction and real estate sectors encourages labor hoarding in unviable construction projects. Since construction projects predominantly use low-skilled workers, banks’ loan-evergreening policy may depress other low-skilled industries. Based on the industry-level data in each of Japan’s 47 prefectures from 1992-1996, we document empirical facts consistent with this hypothesis. On average, lowskilled industries experienced disproportionately slower output and employment growth and more sluggish growth in the number of new establishments in prefectures where the share of bank loans to local construction/real estate sectors increased more after construction boom ended.

Suggested Citation

  • Kin Wai Cheung & Masami Imai, 2023. "Zombie Lending, Labor Hoarding, and Local Industry Growth," Wesleyan Economics Working Papers 2023-003, Wesleyan University, Department of Economics.
    • Handle: RePEc:wes:weswpa:2023-003
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