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Payment Uncertainty, the division of labor, and productivity declines in great depressions

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  • Keiichiro Kobayashi
Abstract
This paper proposes a simple model that formalizes a variant of Ohanian's (2001) conjecture explaining the productivity declines observed in the Great Depression. If a large payment shock like an asset-price collapse renders many firms insolvent, other economic agents become exposed to a higher risk of not being paid (payment uncertainty). The payment uncertainty causes endogenous disruptions of the division of labor among firms, thereby lowering macroeconomic productivity. The prediction of the model is that productivity correlates negatively with bankruptcies and positively with the cost share of intermediate inputs, which is consistent with the data from depression episodes. The model implies that the so-called failure of macroeconomic policy in the United States during the early 1930s, when a rash of bankruptcies occurred, could actually have been welfare enhancing, since the quick exit of insolvent agents can resolve payment uncertainty quickly.

Suggested Citation

  • Keiichiro Kobayashi, 2004. "Payment Uncertainty, the division of labor, and productivity declines in great depressions," Discussion papers 04037, Research Institute of Economy, Trade and Industry (RIETI).
    • Handle: RePEc:eti:dpaper:04037
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    References listed on IDEAS

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    Cited by:

    1. KOBAYASHI Keiichiro, 2009. "Asset-Price Collapse and Market Disruption - A model of financial crises -," Discussion papers 09045, Research Institute of Economy, Trade and Industry (RIETI).
    2. Hatchondo, Juan Carlos & Martinez, Leonardo, 2009. "Long-duration bonds and sovereign defaults," Journal of International Economics, Elsevier, vol. 79(1), pages 117-125, September.
    3. Keiichiro Kobayashi, 2023. "Recursive expectations approach in policymaking," International Journal of Economic Policy Studies, Springer, vol. 17(2), pages 385-397, August.
    4. Andrzej Rzonca & Piotr Cizkowicz, 2014. "The effects of unconventional monetary policy: what do central banks not include in their models? / Skutki niekonwencjonalnej polityki pieniê¿nej: czego banki centralne nie uwzglêdniaj¹w swoich modela," mBank - CASE Seminar Proceedings 131, CASE-Center for Social and Economic Research.
    5. Leonardo Martinez & Juan Carlos Hatchondo, 2008. "A model of credit risk without commitment," 2008 Meeting Papers 940, Society for Economic Dynamics.
    6. Juan Carlos Hatchondo & Leonardo Martinez & Horacio Sapriza, 2009. "Heterogeneous Borrowers In Quantitative Models Of Sovereign Default," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(4), pages 1129-1151, November.
    7. Piotr Ciżkowicz & Andrzej Rzońcaz, 2017. "Are Major Central Banks Blinded By The Analytical Elegance Of Their Models? Possible Costs Of Unconventional Monetary Policy Measures," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 62(01), pages 87-108, March.
    8. Maoyong Cheng & Zhenjun Li, 2023. "Public governance and firm total factor productivity: Evidence from a quasi‐natural event in China," Economics of Transition and Institutional Change, John Wiley & Sons, vol. 31(3), pages 683-719, July.
    9. Akiyoshi, Fumio & Kobayashi, Keiichiro, 2010. "Banking crisis and productivity of borrowing firms: Evidence from Japan," Japan and the World Economy, Elsevier, vol. 22(3), pages 141-150, August.

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    More about this item

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes

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