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

Keiichiro Kobayashi

Research output: Contribution to journalArticle

4 Citations (Scopus)

Abstract

This paper proposes a simple model that formalizes a variant of Ohanian's conjecture explaining the productivity declines observed in the Great Depression [Ohanian, L.E., 2001. Why did productivity fall so much during the Great Depression? American Economic Review 91 (2), 34-38]. 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.

Original languageEnglish
Pages (from-to)715-741
Number of pages27
JournalReview of Economic Dynamics
Volume9
Issue number4
DOIs
Publication statusPublished - 2006 Oct 1

Keywords

  • Division of labor
  • Great depressions
  • Payment uncertainty
  • Productivity

ASJC Scopus subject areas

  • Economics and Econometrics

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