Government Financial Institutions and Capital Allocation Efficiency in Japan

Masami Imai

No 2018-002, Wesleyan Economics Working Papers from Wesleyan University, Department of Economics

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.

Pages: 37 pages
Date: 2018-06, Revised 2020-03
New Economics Papers: this item is included in nep-fdg and nep-knm
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Citations: View citations in EconPapers (4)

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http://repec.wesleyan.edu/pdf/mimai/2018002_R_imai.pdf First version, 2018 (application/pdf)
http://repec.wesleyan.edu/pdf/mimai/2018002_imai.pdf Revised version, 2020 (application/pdf)

Related works:
Journal Article: Government financial institutions and capital allocation efficiency in Japan (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:wes:weswpa:2018-002

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