Zombie Lending, Labor Hoarding, and Local Industry Growth

Kin Wai Cheung and Masami Imai

No 2023-003, Wesleyan Economics Working Papers from Wesleyan University, Department of Economics

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.

Pages: 33 pages
Date: 2023-01
New Economics Papers: this item is included in nep-ban, nep-fdg and nep-ure
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Journal Article: Zombie lending, labor hoarding, and local industry growth (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:wes:weswpa:2023-003

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