Faculty Bibliography
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For decades, scholars outside of economics have explained Japanese economic growth through prudent government management. Although economists have been more critical, even they have usually viewed favorably the role the government played in finance. In these favorable accounts, they often give the Industrial Bank of Japan (IBJ; Kogin) a central place. Founded in 1902 to encourage long-term industrial investment, the bank maintained a reputation as the "central bank for manufacturing." During those pre-war decades, observers continue, it also developed the monitoring technology now basic to the "main bank system." In the article that follows, we show that the IBJ never lived up to this reputation. We make four broad points. First, the IBJ never received from the government subsidies sufficient to have significantly increased the funds available to manufacturing firms. The subsidies it could offer began modest, and stayed modest. Second, despite its billing, during the early decades it did not lend primarily to manufacturing firms. Third, when in the early years it lent to borrowers dictated by the government, it lent pursuant to a political rather than high-growth dynamic. When it lent to government-dictated borrowers in the later pre-war years, it did so to subsidize the war. Last, the IBJ never developed any unusual ability to monitor borrowers. In the end, the manufacturing firms in pre-war Japan simply did not need another bank. Granted, to fuel their expansion they needed vast amounts of investment. But it was money they could -- and did -- obtain directly from the financial markets themselves.
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We are grateful to Ilya Segal and Michael Whinston for improving our analysis. We are pleased they confirm our two main conclusions. The first is that normally a firm cannot use contracts with its customers or suppliers inefficiently to exclude a rival from competition, because the high price of these contracts will make this strategy unprofitable. This is an old point, well summarized in Robert Bork's 1978 book. Second, and in contrast, exclusionary contracts can be profitable, effective, and socially inefficient--under certain limited conditions. One condition is that firms in the industry must be able to operate only at or above some minimum efficient scale. Another condition is that the victims--customers or suppliers--must expect that the exclusionary tactic will succeed, and must be unable to coordinate their actions to defeat the tactic. An excluding firm in this situation can buy naked exclusion affordably because it can scare victims into selling cheaply; no single victim can stop the exclusion by itself, so no single victim has any bargaining power. At a theoretical limit, the excluding firm can gain the exclusionary rights for free.
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Observers of the formerly communist transitional economies urge firms there to obtain funds from a relatively few sources. They note the institutional problems the firms face: courts not working, markets not developed, statutes not written. Because these firms cannot rely on the courts to discipline managers, they predict that firms will do best if they raise their capital only from a few concentrated sources. Firms in Japan at the close of the 19th century faced a similar "transitional" institutional environment. They too faced disfunctional courts, nascent markets, and non-existent statutes. Yet the firms that succeeded in Japan were not the ones that took the tack proposed by modern observers of transitional economies. They were the ones that used little debt and raised their equity from a large number of investors. In this article, we outline how concentrated finance can introduce problems potentially as severe as the ones it supposedly mitigates, and discuss why dispersed equity did not reduce firm efficiency in late-19th century Japan. Although investors with relatively large stakes can indeed provide a firm value, they do so only under limited conditions -- and we explore what some of those conditions might be.
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Although the independence of judges in Japan is protected by the Constitution, the structure of the judicial system permits the career of "wayward" judges to be derailed.
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Observers of modern transitional economies urge firms there to ignore stock markets. Stock markets simply will not work in such environments, they explain. Firms should instead rely on debt finance, particularly bank debt. Only then will they be able to keep principal-agent (i.e., investor-manager) slack to manageable levels. Turn-of-the-century Japanese firms faced problems that closely mirrored those in modern eastern Europe. Yet in Japan, the successful large firms did not rely on debt. Instead, they raised their funds through the stock market, and took a variety of steps to mitigate the principal-agent slack involved. As one of those steps, they recruited prominent investors to their boards. Using data on firms in the cotton-spinning industry (arguably the most important industrial sector in turn-of-the-century Japan), we explore why the firms recruited prominent directors. First, we note that firms with such directors had higher profits than others. In part, they probably had higher profits because such investors had an eye for firms that would likely succeed. In part too, however, they seem to have had higher profits because those investors brought basic management skills -- they knew how to monitor and when to intervene. Second, prominence held constant, we find that firms did not have higher profits by having directors affiliated with a bank or with other spinning firms. One might have thought directors with access to a bank or spinning technology would raise profits at a firm. In fact, they did not, for banks did not have the funds to lend, and the technology was freely available. Last, we explore whether the directors certified firm quality on behalf of other investors. Although firms with prominent directors apparently did have an advantage in the capital market, we conclude that quality certification was at most a by-product (if even that) of the monitoring and intervention these directors performed.
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In this introduction to Japanese law, J. Mark Ramseyer and Minoru Nakazato combine an economic approach with a clear and often amusing account of the law itself to challenge commonly held ideas about the law. Arguing against such things as the assumption that Japanese law differs from law in the United States and the idea that law plays only a trivial role in Japan or is culturally determined, this book will be recognized as a major contribution to the understanding of Japanese law. Awarded the Professional/Scholarly Publishing Award by the Association of American Publishers for the best book in law (1999). Excerpts reprinted in: Comparative Corporate Law: United States, European Union, China and Japan, Cases and Materials (Larry Catá Backer ed., 2002) and Civil Litigation in Comparative Context (Oscar G. Chase, et al. eds., 2007). Paperback edition (2000).
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The tax office wins most cases in Japan. We think about why this might be. We find that although judges who rule in favor of the taxpayer do not suffer in their future careers, if the loser - whether government or taxpayer - appeals and wins, the reversed judge's career does take a turn for the worse. This implies that the government cares more about accurate judging than about pro-government judging.
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Although sometimes said to reflect distinctively Japanese modes of economic organization or the general importance of path-dependence and culture, the cross-shareholding patterns within the Japanese keiretsu often display a straightforward economic logic. When keiretsu banks trade on debtor stock, for example, they occasionally seem to be capturing gains from inside information. When manufacturers in the automobile industry buy stock in their suppliers, they apparently do so to protect relationship-specific investments. And when the pre-war predecessors to the keiretsu invested in component firms, they often invested in ways that resembled the ways silicon valley venture capitalists invest today. Economic form may differ between the U.S. and Japan, but the cross-shareholdings themselves reflect a simple economic rationale.
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By standard economic logic, the governance systems that successful firms adopt should (on the more substantial aspects) tend to converge over time. In this paper, I investigate one of the ways in which Japanese corporate governance is said not to converge with U.S. governance: cross-shareholding arrangements. I find evidence for four propositions, all of which suggest that standard economic principles -- independent of any differences in social context -- largely explain Japanese shareholding patterns. First, the pre-war zaibatsu functioned largely as venture capital firms. Second, the cross-shareholding among the non-functional firms in the keiretsu is trivial. Third, the cross-shareholding among the financial firms in the keiretsu is an artifact of insider trading. Last, the cross-shareholding among firms in the automobile industry is a means of controlling opportunism in the presence of relationship-specific investments (as predicted by Klein, Crawford & Alchian and Gilson and Roe).
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Because civil-law systems hire unproven jurists into career judiciaries, many maintain elaborate incentive structures to prevent their judges from shirking. We use personnel data (backgrounds, judicial decisions, job postings) on 275 Japanese judges to explore general determinants of career success and to test how extensively politicians manipulate career incentives for political ends. We find strong evidence that the judicial system rewards the smartest and most productive judges. Contrary to some observers, we find no evidence of on-going school cliques, and no evidence that the system favors judges who mediate over those who adjudicate. More controversially, we locate three politically driven phenomena. First, even as late as the 1980's, judges who joined a prominent leftist organization in the 1960's were receiving less attractive jobs. Second, judges who decided a high percentage of cases against the government early in their careers were still receiving less attractive jobs than their peers in the 1980s. Finally, whenever a judge decided a case against the government, he incurred a significant risk that the government would soon punish him with a less attractive post.
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Employing a rational-choice approach, Professor Ramseyer studies the impact of Japanese law on economic growth in Japan. Toward that end, the author investigates the way law governed various markets, and the way that people negotiated contracts within those markets. Findings reveal that the legal system generally promoted mutually advantageous deals, and that people generally negotiated in ways that shrewdly promoted their private best interests. Whether in the markets for indentured servants, prostitutes, or marriage partners, this study reports little evidence of either age- or gender-related exploitation. Paperback edition, 2008.
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From time to time, observers argue that important facets of corporate governance are explicable only in path-dependent terms. Some buttress this claim with comparisons between U.S. and Japanese patterns of corporate governance. Using data that Kaplan has discussed in other contexts, we dispute the empirical foundation of this path-dependence claim. In fact, we find that U.S. and Japanese governance patterns are remarkably similar. We suggest that this similarity may imply that competitive product, capital and labor markets largely vitiate historically based idiosyncracies in governance.
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Japan had a voluntary products liability system until 1995. The voluntary system allowed consumers to determine whether they wished to pay more for a product that conformed to a strict products liability standard or would rather pay a lower price and assume more risk for a product that met a less stringent standard. Advocates of mandatory products liability maintain that consumers would rarely be compensated for defective products without a legal requirement, but the case of Japan shows how private ordering can result in a more flexible system.
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Using a data set of about 1,000 Japanese contracts, I study the relationships among urban labor markets, peasant employment contracts, and parental control over work-age children From 1600 to the mid-18th century, the use of contracts for the sale, pledge, or long-term employment of a large nonagricultural labor market. Because this market (with its informal, at-will contractual terms) made it profitable for so many children to abscond, it threatened any property right that parents may once have had in their children's work. And absent that property right, most employers no longer offered long-term contracts on attractive terms. By making it profitable for dissatisfied children to abscond, this new labor market also reduced the control that parents had over their children. Indirectly to be sure, it shaped relations within the family and constrained domestic exploitation as well.
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This book examines a key question of modern Japanese politics: why the Meiji oligarchs were unable to design institutions capable of protecting their power. The authors question why the oligarchs chose the political institutions they did, and what the consequences of those choices were for Japan's political competition, economic development, and diplomatic relations. Indeed, they argue, it was the oligarchs' very inability to agree among themselves on how to rule that prompted them to cut the military loose from civilian control--a decision that was to have disastrous consequences not only for Japan but for the rest of the world. Paperback edition, with corrections, 1998. Awarded Luebbert Award, for best book in Comparative Politics, American Political Science Association. Translated and republished as: Nihon seiji to goriteki sentaku [Japanese Politics and Rational Choice] (Tokyo: Keiso shobo, 2006).
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Legislators in modern democracies (a) accept bribes that are small compared to the value of the statutes they pass and (b) allow bans against bribery to be enforced. In our model of bribery, rational legislators accept bribes smaller not only than the benefit the briber receives but than the costs the legislators incur in accepting the bribes. Rather than risk this outcome, the legislators may be willing to suppress bribery altogether. The size of legislatures, the quality of voter information, the nature of party organization, and the structure of committees will all influence the frequency and size of bribes.
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The Japanese main bank system is characterized by a nexus of implicit contracts.This chapter examines whether such unspoken agreements are really made, based on a comparison of Japanese and American banking systems. It is argued that if banks and firms want the arrangements stipulated by implicit contracts, then these should have been negotiated explicitly, and laid down in court-enforceable agreements. The fact that firms do not draft such agreements may indicate that they did not make them at all.
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This Article applies Japanese market behavior to Richard Epstein's theories in his book Forbidden Grounds: The Case Against Employment Discrimination. The author uses Japan to argue that economic incentives need not matter, and that whatever incentives markets and laws may provide, people may still ignore them. This Article suggests that if independent social norms can sustain systematically unprofitable behavior in Japan, then maybe they would have sustained Jim Crow policies in the American south. If Japanese routinely ignore economic incentives to perpetuate social norms, then whites might have ignored the market advantage to hiring African Americans and discriminated against their own best interests.
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Mark Roe's analysis of governance patterns in Japanese corporations is examined, and the reason why "corporate governance" may not explain the Japanese phenomena Roe describes is demonstrated.
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Mark Ramseyer and Frances McCall Rosenbluth show how rational-choice theory can be applied to Japanese politics. Using the concept of principal and agent, Ramseyer and Rosenbluth construct a persuasive account of political relationships in Japan. In doing so, they demonstrate that political considerations and institutional arrangements reign in what, to most of the world, looks like an independently powerful bureaucratic state. Paperback edition, with a new Preface, 1997. Excerpts reprinted in: Comparative Law: Law and the Legal Process in Japan (Kenneth L. Port & Gerald Paul McAlinn, eds., 2d ed. 2003) and The Japanese Legal System: Text and Materials (Meryll Dean ed., 1997). Translated and republished as: Nihon seiji no keizaigaku: seiken seito no goriteki sentaku [The Economics of Japanese Politics: A Rational-Choice Approach to Political Administration and Political Parties] (Tokyo: Kobundo Press, 1995).
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Ordinarily, a monopoly cannot increase its profits by asking customers to sign agreements not to deal with potential competitors. If, however, there are 100 customers and the minimum efficient scale requires serving 15, the monopoly need only lock up 86 customers to forestall entry. If each customer believes that the others will sign, each also believes that no rival seller will enter. Hence, an individual customer loses nothing by signing the exclusionary agreement and will indeed sign. Thus, naked exclusion can be profitable.
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The United Shoe case banned lease-only policies by monopolists. But the court erred in believing that monopoly pricing could explain United Shoe Machinery's complex of leasing policies. At best, this explanation only accounts for a few details of the case. The bulk of the company's conduct seems simply efficient -- suggesting that the Shoe decision was wrong and its later precedential consequences pernicious. The Coase Conjecture might seem to make some sense of Shoe's ban on monopoly leasing, and suggests that the Shoe rule may have been too narrow. At the same time, however, the Conjecture dictates that the Shoe rule be confined ways the opinion did not suggest that are unacceptably costly to accomplish. Courts would do well to accept that Coase describes a problem that is real. But they would also do well to accept it as a problem not worth solving.
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Graetz and Kaplow (1986) took the analysis of tax reform beyond rhetorical condemnations of retroactivity. They seemed also to take it beyond the automatic imposition of grandfather rules and beyond Adam Smith's famous preference for old taxes over new. Unfortunately, Graetz and Kaplow make several assumptions...
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