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"

NBER Working Paper No. 13298
Issued in August 2007
NBER Program(s): IO PR LS

---- Abstract -----

Nishimura et al. (2005) analyze the entry/exit behavior of Japanese firms during the 1990s and find that relatively efficient firms exited while relatively inefficient firms survived during the banking-crisis period of 1996-97. They conclude that the natural selection mechanism (NSM) apparently malfunctions during severe recessions, but we offer a more plausible interpretation: NSM continued to function effectively even during this period, but aberrant banking practices caused a shift in the type of natural selection from directional to disruptive selection, with the most efficient as well as the least efficient firms being favored and firms of intermediate efficiency being selected against.

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