Faculty Bibliography

By juxtaposing at-will employment with corporate fiduciary duties, Jordan v. Duff & Phelps creates something of a classroom brain-twister. Yet the exchange between Frank Easterbrook (writing for the majority) and Richard Posner (dissenting) also illustrates two fundamental but seldom recognized principles of real-world courts. First, the bench is properly a place for honest jurists of moderate talent (ideally, monitored for their work). It is not a place for men and women with the independence and sophistication of Posner and Easterbrook. Such judges can muddy the law by trying to fix bad precedent, and worsen the law by setting interventionist examples for their far less talented peers. Second, by basic second-best principles, the right legal rule for a substantial fraction of contractual disputes is not a rule designed to facilitate efficient deals. It is a rule that dismisses a plaintiff’s claim forthright. We live in a world with imperfect judges, costly and dishonest attorneys, and only moderately intelligent juries. As Posner implicitly recognizes in Jordan (but other judges rarely do), many cases are simply beyond the capacity of such real-world courts to handle cost-effectively.

Corporate law scholars sometimes present creditor-monitoring as a solution to the problems posed by dispersed ownership. They then cite the Japanese “main bank system” as an example of a successful, economy-wide creditor-monitoring regime. In fact, the Japanese main bank system does not exist, and never did. More basically, however, such scholars miss the way that dispersed ownership need not necessarily pose a “problem”: sometimes it does, but the firms with such ownership for which it is a problem will tend to abandon it or disappear. If firms in competitive economies maintain dispersed ownership structures, usually they maintain them because the structure fits the exigencies the firm presents. Neither does creditor monitoring necessarily present a “solution”: sometimes it does, and the firms with such a system for which it does work as a solution will tend to keep it and persist. If firms lack creditor monitoring, usually they lack it because it would not fit.

Provides more than seven hundred alphabetical entries covering the interaction of law and society around the globe, including the sociology of law, law and economics, law and political science, psychology and law, and criminology.

In many ways, the current financial distress in Japan traces itself to the limited range of non-bank financial intermediaries available. That limited availability is itself a creature of regulation. By examining the recent deregulation of commercial paper issues by financial intermediaries, we explore the dynamics of the regulatory process that originally contributed to - if not caused - the current distress. We also use this case study to explore the dynamics of the Japanese legislative and regulatory process more generally. We characterize deregulation as a bargain between banks and the newer non-bank intermediaries: the banks acquiesced to commercial paper issues by non-banks, while the non-banks agreed to the regulatory jurisdiction of the Ministry of Finance. The non-banks obtained a cost-effective way to raise additional funds; the banks brought their new competitors within their regulatorily enforced cartel. At a specific level, the dynamics illustrate the classic Stiglerian theory of regulation; at a more general level, they illustrate the trans-national economic logic to the Japanese legislative and regulatory process.

Because of the risk of political interference, in countries with managed courts jurists who share ruling-party preferences disproportionately self-select into judicial careers. During political turmoil, such jurists will find judicial careers less attractive. Orthodox potential jurists will disproportionately shun the courts, and orthodox incumbent judges will disproportionately resign. Unorthodox potential jurists, on the other hand, might find the judiciary more attractive. Combining data on a random sample of 1,605 Japanese lawyers and all 2,502 judges hired between 1971 and 2001, we locate evidence consistent with these hypotheses: after the political crisis of 1993, the recruitment of young lawyers from elite universities lagged, while the number of early resignations increased.

Although the executive branch appoints Japanese Supreme Court justices as it does in the United States, a personnel office under the control of the Supreme Court rotates lower court Japanese judges through a variety of posts. This creates the possibility that politicians might indirectly use the postings to reward or punish judges. For forty years, the Liberal Democratic Party (LDP) controlled the legislature and appointed the Supreme Court justices who in turn controlled the careers of these lower-court judges. In 1993, it temporarily lost control. We use regression analysis to examine whether the end of the LDP’s electoral lock changed the court’s promotion system, and find surprisingly little change. Whether before or after 1993, the Supreme Court used the personnel office to "manage" the careers of lower court judges. The result: uniform and predictable judgments that economize on litigation costs by facilitating out-of-court settlements. Reprinted as a chapter in The Contemporary Civil Law Tradition, edited by John Henry Merryman, David S. Clark & John Owen Haley (2015).

In a series of recent studies, several economic historians (most prominently Richard Sylla) argue that successful economies experience “financial revolutions” before undergoing rapid growth. In the U.S., they suggest Hamilton masterminded the financial revolution by putting the public finance in order and facilitating private banks. Might Matsukata, they continue, have done the same in Japan? Japan did indeed experience a financial revolution in the late 19th century. Matsukata, however, did not mastermind the revolution in advance of private-sector demand. Instead, private investors created much of the financial infrastructure in response to demand from industrial firms. What is more, most firms (at least in the pivotal silk industry) raised the funds they needed through trade credit rather than securities markets or banks.

Firms in modern developed economies can choose to borrow from banks or from trade partners. Using first-difference and difference-in-differences regressions on Japanese manufacturing data, we explore the way they make that choice. Whether small or large, they do borrow from their trade partners heavily, and apparently at implicit rates that track the explicit rates banks would charge them. Nonetheless, they do not treat bank loans and trade credit interchangeably. Disproportionately, they borrow from banks when they anticipate needing money for relatively long periods, and turn to trade partners when they face short-term exigencies they did not expect. This contrast in the term structures of bank loans and trade credit follows from the fundamentally different way bankers and trade partners reduce the default risks they face. Because bankers seldom know their borrowers' industries first-hand, they rely on guarantees and security interests. Because trade partners know those industries well, they instead monitor their borrowers closely. Because the costs to creating security interests are heavily front-loaded, bankers focus on long-term debt. Because the costs of monitoring debtors are on-going, trade creditors do not. Despite the enormous theoretical literature on bank monitoring, banks apparently monitor very little.

Economists and legal scholars routinely posit an implicit contract between Japanese firms and their principal lender (called their "main bank"). Under this arrangement, the bank implicitly agrees to rescue the firm (through financial and managerial help) when times turn bad. Out of court, it rescues the firm from insolvency. Not only does it save the investments specific to the troubled firm, it lowers the use of costly bankruptcy proceedings and cuts the costs of those bankruptcy procedures it does occasionally invoke. Given the creditor-shareholder conflicts of interest that arise as firms approach insolvency, such arrangements would seem unstable. Yet according to a long sociological tradition, conflicts of interest are inherently less problematic in Japan than in the West. According to the emerging economic and legal tradition, Japanese economic actors do face those conflicts, but keep them in check through reputational concerns, close-knit ties, and government supervision. Using two datasets of troubled firms from the 1970s and 1980s, we ask whether Japanese main banks in fact rescue distressed borrowers. We find no evidence that they do: large Japanese firms fail; when large firms approach insolvency main banks do not increase the share of the firm's debt they bear; stronger ties between distressed firms and their main bank do not facilitate loans; and troubled firms do not try to preserve their main bank relationship. Instead, the claim that Japanese banks implicitly agree to rescue firms is sheer myth. Conflicts of interest do indeed matter in Japan - and they matter enough to prevent precisely the incentive-incompatible rescue deals that scholars in the field so routinely posit.

The Japanese “main bank system” figures prominently in the recent literature on “relationship banking,” for by most accounts the “system” epitomizes relationship finance. Traditionally (according to the literature), every large Japanese firm had a long‐term relationship with one bank that served as its “main bank.” That main bank monitored the firm, intervened in its governance through board appointments, acted as the delegated monitor for other creditors, and agreed to rescue the firm if it fell into financial distress. As Japan deregulated its financial markets in the 1980s, however, these firms abandoned their relational lender for market finance. As main banks then lost their ability to constrain the firms—as relationship banking unraveled—the firms gambled in the stock and real estate bubbles, and threw the country into recession. Using financial and governance data from 1980 through 1994, we show that none of this is true. The accounts of the Japanese main bank instead represent fables, mythical stories scholars recite because they so conveniently illustrate theories and models in vogue.

The Japanese antitrust agency (the J-FTC) holds a jurisdictional monopoly over most issues. Because overlapping jurisdictions would enable politicians to gauge relative bureaucratic performance, this monopoly prevents politicians from monitoring the agency on most issues. In response, J-FTC bureaucrats have chosen not to enforce those statutory provisions like criminal penalties that firms might contest, and firms face virtually no criminal sanctions for antitrust violations. Most Japanese markets are still competitive—but primarily because they are large, fluid, and easy to enter. The J-FTC enforces the law only in areas where politicians can monitor its performance, and politicians have the information they need to monitor only on issues about which they care deeply. Although monopolist agencies will regulate less actively than competitive agencies, politicians do not win elections by creating agencies they cannot control, and even monopolist agencies will regulate actively when politicians can gauge their performance. In equilibrium, therefore, politicians will grant agencies a jurisdictional monopoly over electorally important issues only when they have access through other sources for information by which they can monitor their bureaucrats.

Although reformers often claim Japanese firms appoint inefficiently few outside directors, the logic of market competition suggests otherwise. Given the competitive product, service, and capital markets in Japan, the firms that survive should disproportionately be firms that tend to appoint boards approaching their firm‐specifically optimal structure. The resulting debate thus suggests a test: do firms with more outsiders do better? If Japanese firms do maintain suboptimal numbers of outsiders, then those with more outsiders should outperform those with fewer; if market constraints instead drive them toward their firm‐specific optimum, then firm characteristics may determine board structure, but firm performance should show no observable relation to that structure. We explore the issue with data on the 1000 largest exchange‐listed Japanese firms from 1986 to 1994. We first ask which firms tend to appoint which outsiders to their boards. We find the appointments decidedly nonrandom. Firms appoint directors from the banking industry when they borrow heavily, when they have fewer mortgageable assets, or when they are themselves in the service and finance industry. They appoint retired government bureaucrats when they are in construction and sell a large fraction of their output to government agencies, and they appoint other retired business executives when they have a dominant parent corporation or when they are in the construction industry and sell heavily to the private sector. Coupling OLS regressions with two‐stage estimates on a subset of the data, we then ask whether the firms with more outside directors outperform those with fewer, and find that they do not. Instead, the regressions suggest—exactly as the logic of market competition predicts—that firms choose boards appropriate to them.

This chapter discusses why the following hypotheses are false: (i) over the past century, Japanese firms have significantly changed the way they govern themselves; (ii) from a governance regime where the state (and banks) played a major role, Japanese firms have shifted to one more closely tied to the market; and (iii) in part because of the way the state intervened in the Japanese economy, Japanese firms long maintained (and still maintain) a variety of badly inefficient governance mechanisms. The chapter proceeds through a series of seven propositions which explain how, over the past century, Japanese firms created the vibrant and wealthy economy that exists today. To facilitate that growth, the government did little more than define and enforce the property rights necessary in any competitive market economy. In this world, firms used the corporate form to generate the funds they needed, and large firms heavily raised those funds through equity. They faced relentlessly competitive capital, product, service, and labour markets. And because they did, the firms that survived have overwhelmingly maintained governance regimes that fit the vagaries of those markets.

Implicitly extending Stigler (1977), William Klein proposes a lexicon of twenty-eight generic arguments for normative corporate law scholarship in Criteria for Good Laws of Business Association. He suggests that adopting the lexicon would enhance the efficiency and precision of legal debate. Workable? Hardly. Since when, after all, do we select our colleagues for their communicative efficiency or precision? Yet perhaps Criteria is not about communicative efficiency at all. Perhaps it is about content-and the vacuum at the heart of most legal scholarship-instead.

Increased regulatory competition has sharpened the comparative awareness of advantages or disadvantages of different national models of political economy, economic organization, governance, and regulation. Although institutional change is slow and subject to functional complementarities as well as social and cultural entrenchment, at least some features of successful modern market economies have been in the process of converging over the last decades. The most important change is a shift in governance from state to the market. As bureaucratic ex-ante control is replaced by judicial ex-post control, administrative discretion is replaced by the rule of law as a set of guidelines for the economy. Furthermore, at least to some extent, public enforcement is being reduced in favour of private enforcement by way of disclosure, enhanced liability, and correspondent litigation for damages. Corporatist approaches to governance are giving way to market approaches, and outsider and market-oriented corporate governance models seem to be replacing insider-based regimes. This transition is far from smooth and poses a daunting challenge to regulators and academics trying to redefine the fundamental governance and regulatory setting. They are confronted with the task of making or keeping the national regulatory structure attractive to investors in the face of competitive pressures from other jurisdictions to adopt state-of-the-art solutions. At the same time, however, they must establish a coherent institutional framework that accommodates the efficient, modern rules with the existing and hard-to-change institutional setting. These challenges – put in a comparative and interdisciplinary perspective – are the subject of this book, which includes the world's three leading economies and their legal systems on an equal basis.

(Subsequently published in "Explanations in Economic History", 2005, vol. 43, 94-118. ) In a series of pathbreaking articles, Sylla argues that successful economies experience "financial revolutions" before they undergo their periods of rapid growth. In turn, governments generate these revolutions by putting public finance in order, and thereby giving private investors the incentive to create banks and securities markets. In the U.S., suggests Sylla, Hamilton masterminded the revolution. Might Matsukata, he continues, have done the same in Japan? Consistent with much of Sylla's work, Japan did indeed experience a financial revolution in the late 19th century. Matsukata, however, did not mastermind the revolution in advance of private-sector demand. Instead, private investors created the financial infrastructure in response to demand from industrial firms. What is more, most firms (at least in the pivotal silk industry) raised the funds they needed through trade credit rather than securities markets or banks. In this environment, the financial revolution contributed to economic growth in three ways: (a) the new securities markets funded the very largest firms, particularly the railroad firms; (b) the new banks sold the transactional services that merchants used to provide their trade credit, and (c) the banks supplied some of the funds that the merchants as intermediaries then re-lent to the manufacturing firms.

Despite the many economic studies documenting the problems governments face in trying to control or guide economic growth, the literature on postwar Japan posits an exception: during the first three years after World War II, the Japanese government (working with the Allied occupation) effectively promoted growth. Through a variety of price, quantity and import controls (collectively called the "keisha seisan hoshiki," or the "priority production method"), it boosted production in several vital industries -- most prominently coal and steel. This did not happen. The early postwar Japanese government merely continued the controls it had used during wartime. Those controls had not promoted growth during the war, and they did not promote it after. Instead, they simply created the predictable combination of official shortages and black-market supplies. By the late 1940s the economy started to revive, but it did not revive because of these command schemes. Instead, it revived because these bureaucrats abandoned their attempts at control. They did not abandon the controls because of any change of heart. Instead, they abandoned them because voters made them abandon the controls. In 1948 Japanese voters threw out their socialist coalition cabinet and installed the predecessor to the modestly right-of-center governments that would rule Japan for the next half century. That government then ended the controls and imposed monetary discipline. Crucially, the Japanese government did not shift economic policy because of any pressure from Washington. Instead, it shifted from socialist-oriented controls to a more market-oriented approach before the Washington shift (symbolized by Dodge's arrival) usually credited with the transformation. Before then, interventionist American bureaucrats had dominated occupation policy, and backed the growth-retarding controls implemented by the Japanese government. The dynamics between the occupation bureaucracy and the Japanese government are crucial. During the early post-war years, interventionist bureaucrats ran the Allied occupation. Similarly interventionist Japanese officials had then used pressure from those Allied bureaucrats to hold at bay their domestic rivals who (having seen first-hand the failure of economic controls during the war) hoped to dismantle the wartime control structure. During the first years of the occupation, these interventionists successfully kept the controls in tact -- but brought about an economic disaster. Under strong electoral pressure, in 1948 their non-interventionist rivals prevailed. Shortly thereafter (crucially -- thereafter, not before), non-interventionists in Washington forced a similar shift in Allied policy as well. All this should put in perspective the role that the Allied occupation played in the Japanese recovery. Fundamentally, occupation bureaucrats did not promote economic recovery; during the early post-war years, they dramatically retarded it. Japan did not grow because of occupation policy; it grew in spite of it. And the shift toward healthier economic policies did not begin in Washington; it began among Japanese voters, and began in opposition to Washington. We begin by showing the ineffectiveness of the "priority production method" and the intellectual origins of the myth of its efficacy (Sections 2-3). To make the point in more detail, we take the coal industry as a case study (Section 4). We then turn to the electoral determinants of Japanese policy (Section 5), and conclude by exploring the effect of the occupation (Section 6).

Despite the many economic studies documenting the problems governments face in trying to control or guide economic growth, the literature on postwar Japan posits an exception: during the first three years after World War II, the Japanese government (working with the Allied occupation) effectively promoted growth. Through a variety of price, quantity and import controls (collectively called the "keisha seisan hoshiki," or the "priority production method"), it boosted production in several vital industries -- most prominently coal and steel. This did not happen. The early postwar Japanese government merely continued the controls it had used during wartime. Those controls had not promoted growth during the war, and they did not promote it after. Instead, they simply created the predictable combination of official shortages and black-market supplies. By the late 1940s the economy started to revive, but it did not revive because of these command schemes. Instead, it revived because these bureaucrats abandoned their attempts at control. They did not abandon the controls because of any change of heart. Instead, they abandoned them because voters made them abandon the controls. In 1948 Japanese voters threw out their socialist coalition cabinet and installed the predecessor to the modestly right-of-center governments that would rule Japan for the next half century. That government then ended the controls and imposed monetary discipline. Crucially, the Japanese government did not shift economic policy because of any pressure from Washington. Instead, it shifted from socialist-oriented controls to a more market-oriented approach before the Washington shift (symbolized by Dodge's arrival) usually credited with the transformation. Before then, interventionist American bureaucrats had dominated occupation policy, and backed the growth-retarding controls implemented by the Japanese government. The dynamics between the occupation bureaucracy and the Japanese government are crucial. During the early post-war years, interventionist bureaucrats ran the Allied occupation. Similarly interventionist Japanese officials had then used pressure from those Allied bureaucrats to hold at bay their domestic rivals who (having seen first-hand the failure of economic controls during the war) hoped to dismantle the wartime control structure. During the first years of the occupation, these interventionists successfully kept the controls in tact -- but brought about an economic disaster. Under strong electoral pressure, in 1948 their non-interventionist rivals prevailed. Shortly thereafter (crucially -- thereafter, not before), non-interventionists in Washington forced a similar shift in Allied policy as well. All this should put in perspective the role that the Allied occupation played in the Japanese recovery. Fundamentally, occupation bureaucrats did not promote economic recovery; during the early post-war years, they dramatically retarded it. Japan did not grow because of occupation policy; it grew in spite of it. And the shift toward healthier economic policies did not begin in Washington; it began among Japanese voters, and began in opposition to Washington. We begin by showing the ineffectiveness of the "priority production method" and the intellectual origins of the myth of its efficacy (Sections 2-3). To make the point in more detail, we take the coal industry as a case study (Section 4). We then turn to the electoral determinants of Japanese policy (Section 5), and conclude by exploring the effect of the occupation (Section 6).

Most of what we collectively think we know about the Japanese economy is urban legend. In fact: - The keiretsu do not exist, and never did. An entrepreneurial research institute in the 1950s created the rosters to sell to Marxist economists looking for the monopoly capital that their theory told them would dominate their bourgeois capitalist world. Western scholars hoping for examples of culture-specific forms of economic organization then brought them back to the U.S. - The zaibatsu did not succeed pre-war because they bought politicians, exploited the poor, or manipulated disfunctional capital markets. They succeeded for all the usual varied reasons a few firms succeed in any modern economy. They acquired the (pejorative) zaibatsu label because they happened to be thriving when muckraking journalists in the 1920s and 30s came looking for someone to blame for the depression. - Japanese firms have no main bank system, and never did. Economists popularized the idea as an anecdote on which to peg their mathematical models, and non-economists use it (like the keiretsu) as yet another putatively culture-bound economic phenomenon. - Japanese firms are neither short of outside directors nor badly governed. The charges simply represent yet another variant on populist journalism. Like firms in other competitive capitalist countries, Japanese firms survive only if they adopt governance mechanisms appropriate to the markets within which they must compete. - The Japanese government never seriously guided or intervened in the Japanese economy. When the economy boomed, politicians and bureaucrats did take credit. They had created the success through their own far-sighted leadership, they claimed. Marxist scholars dominated Japanese social science departments, and they were not about to suggest instead that market competition might account for the success. Happy as they were to find an example of successful government intervention, neither were most Western scholars of Japan.

Change is in the air in Japan, claim many observers: The government is radically deregulating crucial sectors of the economy, the large firms are unwinding their keiretsu corporate groups, and firms and banks are dismantling their main bank arrangements. Some observers see all three as exogenous institutional shocks, while others treat the last two as behavioral responses to the first. In fact, although the first phenomenon would constitute an institutional change if it occurred, it has not - for Japanese bureaucrats had no substantial regulatory power to abandon. Although the last two would constitute market responses if they occurred, they have not either - for firms and banks maintained no groups or main-bank arrangements to unwind or dismantle.

Observers routinely claim that the Japanese government of the high‐growth 1960s and 1970s rationed and ultimately directed credit. It barred domestic competitors to banks, insulated the domestic capital market from international competitive pressure, and capped loan interest rates. In the resulting credit shortage, it promoted industrial policy by rationing credit. As much as the government purported to ration and to direct credit, it apparently accomplished nothing of the sort. It did not block domestic rivals to banks successfully, did not insulate the market from international forces, and did not set maximum interest rates that bound. Using evidence on loans to all 1,000‐odd firms listed on Section 1 of the Tokyo Stock Exchange from 1968 to 1982, we find that observed interest rates reflected borrower risk and mortgageable assets and that banks did not use low‐interest deposits to circumvent any interest caps. Instead, the loan market seems to have cleared at the nominal rates. We follow our empirical inquiry with a case study of the industry to which the government tried hardest to direct credit: ocean shipping. We find no evidence of credit rationing. Despite the government programs to allocate capital, nonconformist firms funded their projects readily outside authorized avenues. Indeed, they funded them so readily that the nonconformists grew with spectacular speed and earned their investors enormous returns.

The debate over the role bureaucrats played in the postwar Japanese economy has been the wrong debate. To date, it has been a debate about effectiveness: the government tried to promote growth through interventionist policies, but did it succeed? In fact, the government never tried. Majority voters did not want interventionist bureaucrats, and consistently rejected communist and socialist candidates offering interventionist approaches. Instead, they chose candidates from the centrist, decidedly non-interventionist party. Reflecting those electoral market exigencies, politicians in power seldom gave their bureaucrats the authority to alter market investment and production decisions. To explore these issues, we first investigate the tools Japanese politicians gave their bureaucrats. We find that bureaucrats lacked the mechanisms they would have needed to shape significantly production or investment. Second, we reexamine the central anecdote behind the legend of Japanese bureaucratic power: the 1965 showdown between Sumitomo Metals and MITI. We find that Sumitomo rather than MITI won the battle. Last, we survey the case law on bureaucratic power, and find that Japanese courts strictly restricted bureaucratic discretion. There is a broader moral here, and it goes to the perils of relying on secondary research. For obvious reasons, Japanese politicians and bureaucrats encouraged stories that disguised ordinary pork-barrel policies as growth-enhancing intervention. Although the tales they told differed little from the self-serving accounts politicians tell everywhere, in the 1960s most Japanese social scientists were Marxists. Understandably, they had little sense of how markets worked, and no skepticism at all about the powers of governments to plan. Yet it is their accounts on which modern observers rely for their picture of the postwar Japanese political economy. Had modern scholars done more than recount the conclusions in the secondary literature, they would have noticed that they were merely adding academic gloss to political sloganeering. Unfortunately, they never tried.

The Japanese "main bank system" figures prominently in the recent literature on "relationship banking." By most accounts, the main bank epitomizes relationship finance: traditionally, every large Japanese firm had one, and that bank monitored the firm, participated in its governance, acted as the delegated monitor for other creditors, and rescued the firm if it fell into financial distress. Yet all this has begun to change, continue these accounts. Japan deregulated its financial markets in the 1980s, and many firms abandoned their relational lender for market finance. As the main banks then lost their ability to constrain firms - as relationship banking unraveled - the firms gambled in the stock and real estate bubbles, the bubbles burst, and the firms threw the country into recession. Using financial and governance data from 1980 through 1994, we show that none of this is true. The accounts of the Japanese main bank instead represent fables, stories we collectively recite because they so conveniently illustrate the theories and models we hope to develop. Whether during the 1980s boom or the 1990s recession, they bore no resemblance to any aspect of Japanese corporate finance or governance.

In 1985, Demsetz and Lehn argued both that the optimal corporate ownership structure was firm‐specific, and that market competition would drive firms toward that optimum. Because ownership was endogenous to expected performance, any regression of profitability on ownership patterns would yield insignificant results. To test this hypothesis, we use the zaibatsu dissolution program from late‐1940s Japan as a natural experiment: an exogenous shock to the equilibrium ownership structure. Through that program, the US‐run occupation removed the more prominent shareholders from many of the most successful Japanese companies. By focusing on the way firms and investors responded to the mandated selloff, we accomplish two goals: (a) we avoid the endogeneity problem that has plagued much of the other research on the subject, and (b) we clarify the equilibrating dynamics by which competitive markets move firms toward their optimal ownership structure. With a sample of 637 Japanese firms for 1953 and 710 for 1958, we confirm the equilibrating mechanism behind the Demsetz‐Lehn hypothesis: between 1953 and 1958, the ex‐zaibatsu firms did retructure their ownership patterns. As of 1953, the unlisted ex‐zaibatsu and new firms still had not been able to negotiate the transactions necessary to approach their profit‐maximizing ownership structures. Even the listed firms had not fully undone the effect of the occupation‐induced changes on managerial practices. By 1958 the firms had done this, and the earlier correlation between profitability and ownership disappeared. By then, firm profitability showed no correlation with ownership, whether under linear, quadratic, or piecewise specifications. We further find no evidence that ex‐zaibatsu firms sought to strengthen their ties to banks over 1953–1958.

Book abstract: Markets for capital, products, and managerial talent are expanding rapidly across national borders, yet domestic laws and practices have never had greater impact on corporate structures and cross-border deals. Investors pursuing high returns and diversification, entrepreneurs seeking capital, and managers endeavoring to restructure troubled enterprises now routinely face transaction counter-parties who operate within different legal and political systems, and who rank social priorities quite differently.This dynamic tension between global markets and domestic institutions.

Central to so many accounts of post‐war Japan, the keiretsu corporate groups lacked economic substance from the start. Conceived by Marxists committed to locating “domination” by “monopoly capital,” they found an early audience among western scholars searching for evidence of culture‐specific group behavior in Japan. By the 1990s, they had moved into mainstream economic studies, and keiretsu dummies appeared in virtually all econometric regressions of Japanese industrial or financial structure. Yet the keiretsu began as a figment of the academic imagination, and they remain that today. Regardless of the keiretsu definition used, cross‐shareholdings within the “groups” were trivial, even during the years when keiretsu ties were supposedly strongest. Neither does membership proxy for “main bank” ties. Econometric studies basing “keiretsu dummies” on the available rosters produce predictably haphazard and unstable results. In the end, the only reliably robust results are the artifacts of the sample biases created by the definitions themselves.

Although observers urge transitional economies to rely on banks rather than stock markets, in early twentieth‐century Japan, large firms did not rely on debt. Instead, they sold stock. To mitigate agency slack, they sometimes recruited prominent investors to their boards. In this context, we use data on cotton‐spinning firms to explore the relationship between board composition and profitability. First, firms that hired prominent directors had higher profits in succeeding years. We hypothesize that these directors brought monitoring skills and certifying credibility: they knew what to expect, knew when and how to intervene, and had the reputations necessary to certify firm quality credibly. Second, firms did not further increase their profitability by appointing directors with access to a bank or to spinning technology. We conclude that the firms probably had access to funds and technological assistance without board connections.

Abstract Alexander Gerschenkron argued that banks facilitate growth in “backward” countries, and modern theorists sometimes similarly claim that banks can promote growth by reducing informational asymmetries and improving the allocation of funds. Japan has played a part in these debates. In early twentieth‐century Japan, firms relied heavily on bank debt, observers argue. Those firms with preferential access to debt outperformed the others, and those that were part of the zaibatsu corporate groups obtained that access through their affiliated banks. In fact, Japanese banks did not play the role attributed to them. Japan was not a bank‐centered economy; instead, firms relied on equity finance. It was not an economy where firms with access to banks outperformed their rivals; instead, such firms earned no advantage. And it was not a world in which the zaibatsu manipulated their banks to favor affiliated firms; instead, zaibatsu banks loaned affiliated firms little more than the deposits those firms had made with the banks. During the first half of the last century, Japanese firms obtained almost all their funds through decentralized, competitive capital markets.

In this essay on Masahiko Aoki's recent study of Japanese corporate governance, we argue that he and others misdescribe Japan on several fundamental dimensions. First, Japanese firms and employees choose neither to arrange implicit life-time employment contracts nor to invest heavily in firm-specific skills. Instead, firms keep employees employed during economic downturns only because interventionist courts do not let them lay their employees off. Second, Japanese firms do not organize themselves into keiretsu corporate groups, do not exchange shares with other alleged group members, and do not necessarily use the money-center bank attributed to the group as their "main bank." Last, Japanese "main banks" neither agree in advance to rescue troubled debtors nor monitor firms on behalf of other creditors.

Several years have passed since the 'store wars' over barriers to foreign products at Japanese distribution firms. Yet among English-speaking readers, how these firms operate remains a puzzle. In this book, the best Japanese scholars in their fields attempt to unravel that puzzle. Avoiding culture-based explanations, they employ a systematic and rigorous economic logic---yet, since they also avoid mathematical notation, the argument remains accessible to generalist readers. Collectively, the authors make four basic points: * Within a country, distribution is less similar than it appears. Not only does it vary enormously across industries, but it often varies within a given industry as well. * Across countries, distribution is less diverse than it appears. Although appearances sometimes suggest major cross-national contrasts, on more careful analysis the differences often disappear. * Distribution sometimes depends on the product involved. Because distribution functions as the principal means by which manufacturers acquire information about consumer preferences, the character of distribution can depend crucially both on demand patterns and on manufacturing technology. * In the absence of regulatory intervention, distribution generally will be efficient and non-exclusionary. Regulation usually introduces inefficiency and often creates barriers to entry. Importantly, however, the targets of exclusion will less often involve foreign than domestic competitors. To illustrate these points, the authors draw on both analyses that cross various sectors and analyses that are specific to sectors; they study both regulated and unregulated industries; they describe industries with extensive imports, industries with extensive exports, and industries with neither; they examine the effect of technological change; and they introduce a variety of case studies, from agriculture and automobiles to electrical appliances and apparel.

For nearly a decade now, the specter of financial malaise has haunted East Asia. It overwhelms the weaker economies. It imperils North America. Persistently, it refuses to retreat. Yet even as the specter teases entrepreneurs with insolvency, some observers suggest that responsibility might lie with the entrepreneurs themselves. Might not the source of the malaise lie in the very governance structures they created and maintain, particularly in the shareholding and board composition patterns they support? Might not its solution lie in legal reforms that would force them to remake those structures? To examine these questions, we consider the governance arrangements at the heart of the malaise: in corporate Japan. Theoretically, we find nothing to suggest that the source of the recession lies in issues of corporate governance, and nothing to suggest that the solution lies in corporate law reform. We then assemble data from the banking industry - one of the sectors most badly struck by the financial crisis. Empirically, we find nothing to suggest that the contested governance structures explain the poor performance of the banks involved.

Observers routinely claim that the Japanese government during the high-growth 1960s and 70s rationed and ultimately directed credit. It banned investments by foreigners, barred domestic competitors to banks, and capped loan interest rates. Through the resulting credit shortage, it manipulated credit to promote its industrial policy. In fact, the government did nothing of the sort. It did not bar foreign capital, did not block domestic rivals, and did not set maximum interest rates that bound. Using evidence on loans to all 1000-odd firms listed on Section 1 of the Tokyo Stock Exchange from 1968 to 1982, we show that the observed interest rates reflected borrower risk and mortgageable assets, and that banks did not use low-interest deposits to circumvent any interest caps. Instead, the loan market probably cleared at the nominal rates. We follow our empirical inquiry with a case study of one of the industries where the government tried hardest to direct credit: ocean shipping. We find no evidence of credit rationing. Rather, we show that non-conformist firms funded their projects readily outside authorized avenues - so readily that the non-conformists grew with spectacular speed and earned their investors enormous returns.

Various theories, notably those of McCubbins & Schwartz and Landes & Posner, say why judicial independence might be desired by voters and politicians. Why, however, are judges independent in some elected regimes but not others? We develop an "alternating-parties" explanation based on the theory of repeated games and use it to explain the differences between Japan in the 1920's, Japan 1950-1990, and federal judges in the United States. We also discuss why other elite bureaucrats are treated differently from judges.

Theory suggests that Japanese politicians have weaker incentives than U.S. politicians to keep lower court judges independent. Accordingly, we hypothesize that Japanese lower court judges who defer on sensitive political questions will do better in their careers. To test this, we assemble several new data sets and measure the quality of the assignments received by about 400 judges after deciding various types of cases. We find that judges who deferred to the ruling party in politically salient disputes obtained better posts than those who did not, and that judges who actively enjoined the national government obtained worse posts than those who did not. We also hypothesize that judges with forthrightly leftist preferences do worse in their careers. We measure the speed at which the 500 judges hired during the 1960s moved up the pay scale and find indications that judges who joined a leftist group were promoted more slowly than their peers.

Prepared for a forthcoming book on the distribution sector in Japan, this essay introduces the distribution network in the apparel industry. We note the varying patterns of cross-market contracting and intra-firm organization in the industry, and trace the economizing logic involved. More specifically, we show how the decision at the firm level of whether to integrate wholesale, retail and production depends crucially on an informational and incentive-based logic, and how that logic is in turn driven by patterns of consumer demand.

Prepared as an introductory chapter to a forthcoming book on the distribution sector in Japan, this essay introduces the basic structure of the industry. We note the way competition drives consumers, sellers, and manufacturers to select distributional arrangements that minimize total costs, and the way that this distributional equilibrium will depend both on patterns of consumer demand and on production technology. To illustrate the way that cross-national distributional practices vary less than often thought, we compare automobile distribution in Japan and the U.S.

In several fields, modern academics trumpet the contingency of social science and the indeterminacy of institutional structures. The Japanese experience during the first half of the 20th century, however, instead tracks what much-derided chauvinists have claimed all along: modern legal institutions largely trump indigenous organizational frameworks, and modern rational-choice theory nicely predicts how people respond to such institutions. As orientalist as it may seem, such theory goes a long way toward explaining the real world in which we live.

This is a wide-ranging selection of 130 readings in Japanese law. The essays, extracted from previously published books and articles, cover subjects including historical context, the civil law tradition, the legal services industry, dispute resolution, constitutional law, contracts, torts, criminal law, family law, employment law, corporate law, and economic regulation. This unique collection of readings is accompanied by the texts of the Japanese constitution and other basic laws.

This volume presents a selection of readings in the political economy of Japanese law.

Planned and designed by a leading Tokyo lawyer and several American practitioners and scholars, Law and Investment in Japan introduces both Japanese law and the strategic issues that arise in cross-border transactions. Centered around the details of an actual joint venture between the U.S. and Japan, the book combines materials from the transaction itself with cases, statutes, and background data. This new second edition reflects recent changes in the law and new directions in scholarly research.

Conviction rates in Japan exceed 99 percent. Because Japanese judges can be penalized by a personnel office if they rule in ways the office dislikes, perhaps they face biased incentives to convict. Using data on the careers and opinions of 321 Japanese judges, we find that judges who acquit do have worse careers following the acquittal. On closer examination, though, we find that the punished judges are not those who acquit on the ground that the prosecutors charged the wrong person. Rather, they acquit for reasons of statutory or constitutional interpretation, often in politically charged cases. Thus, the apparent punishment seems unrelated to any pro‐conviction bias at the judicial administrative offices. We suggest an alternative explanation: the high conviction rates reflect case selection and low prosecutorial budgets; understaffed prosecutors present judges with only the most obviously guilty defendants.

Basic as it has become to studies of the Japanese economy, the concept of the "Keiretsu" is sheer fiction -- a creature of the academic imagination with no basis in real economic behavior. Almost all scholars writing on the subject use the categorization found in the annual Keiretsu no kenkyu [Research on the Keiretsu]. Published by an otherwise unknown Marxist "research institute" since 1960, the volume purports to sort firms by functional groupings. In fact, it simply sorts them by their principal loan source. If that loan source proxied for some unobserved variable, this sorting might be helpful. In fact, it does not. For example, among keiretsu firms, there is little cross-shareholding. Indeed, the non-financial firms in a given keiretsu hold stock in few other keiretsu firms at all. Although financial firms do buy stock in their debtors, they seem as likely to buy the stock of their non-keiretsu debtors as of keiretsu debtors. The lending patterns of financial firms in a keiretsu are usually uncorrelated, and much the same is true of their shareholding patterns.

Longer ago than either of us cares to remember, one of us attended junior high in Tokyo. On Saturdays, he worked at a printed circuit factory. Or maybe "factory" makes it all sound too grand. A small building in back of a gas station, it had three or four punch presses. The "president" supervised matters (though he actually spent more time hanging out at the gas station), together with a sidekick who did assorted odd jobs besides. Several middle-aged women with no apparent technical education or skill ran the presses. The junior high kid spent his time trimming the sheets to which others would eventually attach the transistors. The women then punched the holes and margins onto the boards, and the president's sidekick loaded the finished boards onto a truck. Periodically, he returned them to the firm that had ordered the work and brought more sheets to punch along with any press dies the firm needed. The punch presses were standard generic affairs, and the buyer seems to have kept title to the dies. Thirty years later, the other one of us knows the president of a factory near Nagoya. For many years, the firm has done machining work for a first-tier Toyota subcontractor. Unfortunately for the firm, Toyota has increasingly substituted integrated plastic units for the steel shock absorber parts the firm machines. Worried that the Toyota-bound work might disappear, the president has begun to move the firm toward machining materials for computer hard disks on the side. A machining firm can make a wide variety of products, the president seemed to explain. His firm could make products for the automobile industry or otherwise, Toyota-bound or otherwise. If the demand for shock-absorber parts fell, well then it would simply make computer disks instead.