Zombie lending, labor hoarding, and local industry growth
After the bursting of real estate bubbles in 1991, Japanese banks continued lending to unviable firms to conceal problem loans. We revisit Japan’s experience and propose a new mechanism via which banks’ loan-evergreening policy undermines allocative efficiency across industries by focusing on constr...
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| Published in: | Japan and the world economy Vol. 71; p. 101266 |
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| Main Authors: | , |
| Format: | Journal Article |
| Language: | English |
| Published: |
Elsevier B.V
01-09-2024
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| Subjects: | |
| Online Access: | Get full text |
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| Summary: | After the bursting of real estate bubbles in 1991, Japanese banks continued lending to unviable firms to conceal problem loans. We revisit Japan’s experience and propose a new mechanism via which banks’ loan-evergreening policy undermines allocative efficiency across industries by focusing on construction and real estate loans. Namely, banks’ continuing support for construction and real estate firms encourages labor hoarding in unviable construction projects. Since construction projects predominantly use low-skilled workers, banks’ loan-evergreening policy in these troubled sectors may depress other low-skilled industries. Based on the industry-level data in each of Japan’s 47 prefectures from 1992 to 1996, we document empirical facts consistent with this hypothesis. On average, low-skilled 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.
•We examine whether banks’ loan-evergreening policy undermines allocative efficiency.•We use the industry-level data in each of Japan’s 47 prefectures from 1992 to 1996.•Low-skilled industries grew more sluggishly when the construction and real estate sectors received more loans. |
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| ISSN: | 0922-1425 |
| DOI: | 10.1016/j.japwor.2024.101266 |