NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Unnatural Selection: Perverse Incentives and the Misallocation of Credit in Japan

Joe Peek, Eric S. Rosengren

NBER Working Paper No. 9643
Issued in April 2003
NBER Program(s):   CF   EFG

This study examines the misallocation of credit in Japan associated with the perverse incentives of banks to provide additional credit to the weakest firms. Firms are far more likely to receive additional credit if they are in poor financial condition, and these firms continue to perform poorly after receiving additional bank financing. Troubled Japanese banks allocate credit to severely impaired borrowers primarily to avoid the realization of losses on their own balance sheets. This problem is compounded by extensive corporate affiliations, which provide a further incentive for banks to allocate scarce credit based on considerations other than prudent credit risk analysis.

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Document Object Identifier (DOI): 10.3386/w9643

Published: Peek, Joe and Eric S. Rosengren. "Unnatural Selection: Perverse Incentives And The Misallocation Of Credit In Japan," American Economic Review, 2005, v95(4,Sep), 1144-1166.

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