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A Comment on Nishimura, Nakajima, and Kiyota's Does the Natural Selection Mechanism Still Work in Severe Recessions? Examination of the Japanese Economy in the 1990s

5 Pages Posted: 22 Jan 2007  

Tae Okada

Osaka University - Graduate School of Economics

Charles Yuji Horioka

Asian Growth Research Institute; National Bureau of Economic Research (NBER); Osaka University - Institute of Social and Economic Research (ISER)

Date Written: January 2007

Abstract

Nishimura, Nakajima, and Kiyota (2005) analyze the entry/exit behavior patterns of Japanese firms during the 1990s and find that relatively efficient (high total factor productivity (TFP)) firms exited while relatively inefficient (low TFP) firms survived during the banking-crisis period of 1996-97. They conclude from this finding that the natural selection mechanism (NSM) apparently malfunctions during severe recessions, but we offer a much more plausible interpretation: the NSM continued to function effectively even during this period, but aberrant banking practices (in particular,forbearance lending(evergreening) and the forcible withdrawal of loans and/or the reluctance to lend) caused a shift in the type of natural selection from directional selection to disruptive selection, with the most efficient (highest TFP) firms as well as the least efficient (lowest TFP) firms being favored and firms of intermediate efficiency and TFP being selected against.

Keywords: Total Factor Productivity, Entry and Exit, Natural Selection, Natural Selection Mechanism, Directional Selection, Disruptive Selection, Diversifying Selection, Evolution, Banking Crisis, Forbearance Lending, Forcible Withdrawal of Loans, Reluctance to Lend, Credit Crunch, Recession, Japanese Economy

JEL Classification: D21, D24, O47, L11

Suggested Citation

Okada, Tae and Horioka, Charles Yuji, A Comment on Nishimura, Nakajima, and Kiyota's Does the Natural Selection Mechanism Still Work in Severe Recessions? Examination of the Japanese Economy in the 1990s (January 2007). Available at SSRN: https://ssrn.com/abstract=958157 or http://dx.doi.org/10.2139/ssrn.958157

Tae Okada

Osaka University - Graduate School of Economics ( email )

1-7 Machikaneyama
Toyonaka, Osaka, 560-0043
Japan

Charles Yuji Horioka (Contact Author)

Asian Growth Research Institute ( email )

11-4, Ohtemachi, Kokurakita-ku
Kitakyushu, Fukuoka 803-0814
Japan

HOME PAGE: http://www.agi.or.jp

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

Osaka University - Institute of Social and Economic Research (ISER) ( email )

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Ibaraki, Osaka 567-0047
Japan

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