Resource Reallocation and Zombie Lending in Japan in the '90s

Author Name KWON Hyeog Ug  (Faculty Fellow) /NARITA Futoshi  (University of Minnesota) /NARITA Machiko  (University of Minnesota)
Creation Date/NO. October 2009 09-E-052
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We investigate the efficiency of resource reallocation in Japan during the 1990s, a decade of economic recession, by measuring aggregate productivity growth (APG) using a plant-level data set of manufacturers from 1981-2000. We find that resource reallocation contributed negatively to APG, mainly due to inefficient labor reallocation. A possible reason for the inefficient labor reallocation is misdirected bank lending or "zombie lending" to otherwise defunct plants. To quantify its impact, we develop a model with plant-level heterogeneity, calibrate it based on the results of plant-level productivity estimation, and conduct a counterfactual exercise. The results show that 37% of the actual decline in APG due to inefficient labor reallocation in Japan in the '90s is attributable to "zombie lending."