Unnatural Selection: Perverse Incentives and the Misallocation of Credit in Japan

Joe Peek and Eric Rosengren ()

No 9643, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This study examines the misallocation of credit in Japan associated with the perverse incentives of banks to provide additional credit to the weakest firms. Firms are far more likely to receive additional credit if they are in poor financial condition, and these firms continue to perform poorly after receiving additional bank financing. Troubled Japanese banks allocate credit to severely impaired borrowers primarily to avoid the realization of losses on their own balance sheets. This problem is compounded by extensive corporate affiliations, which provide a further incentive for banks to allocate scarce credit based on considerations other than prudent credit risk analysis.

JEL-codes: E51 G21 (search for similar items in EconPapers)
Date: 2003-04
New Economics Papers: this item is included in nep-fin and nep-rmg
Note: CF EFG
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Citations: View citations in EconPapers (43)

Published as Peek, Joe and Eric S. Rosengren. "Unnatural Selection: Perverse Incentives And The Misallocation Of Credit In Japan," American Economic Review, 2005, v95(4,Sep), 1144-1166.

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