Organisational inertia in Japanese institutions

Journal of Asian Economics 18 (2007) 915–933

Organisational inertia in Japanese institutions Akihito Asano a,*, Takaharu Eto b a

School of Economics (Building 25A), The Australian National University, Canberra, ACT 0200, Australia b Shaw Business Consulting, Abiko, Chiba 270-1154, Japan Received 13 December 2006; received in revised form 9 July 2007; accepted 27 July 2007

Abstract A bureau of hierarchical authority is responsible for overseeing the banking industry. We show that career concerns of officials in the authority generate organisational inertia in the sense that, regardless of changes in the environment, a new junior official prefers to stick to the decision made by the former junior official, which may be suboptimal. This kind of inertia is acute in typical Japanese organisations, which have lifetime employment with internal promotion. We provide anecdotal evidence from the Ministry of Finance’s policy making in the early 1990s, which seems to be well explained by our model. # 2007 Elsevier Inc. All rights reserved. JEL classification: D73; G28; L20 Keywords: Organisational inertia; Japanese economy; Career concerns; Banking industry

1. Introduction The systemic risk in the Japanese financial industry materialised in November 1997. The crisis started with the collapse of a brokerage house. On 3 November 1997, Sanyo Securities, one of the medium-sized securities firms, went bankrupt and defaulted on its interbank loans. This credit event exacerbated the financial sector problems to a critical point. The Sanyo case was the first default in the domestic interbank market since World War II. Thereafter, investors became extremely cautious in providing surplus funds to the interbank market, which eventually made it impossible for those financial institutions already suffering from liquidity problems to finance funds for their operations. The sudden credit crunch in the interbank market following the Sanyo case was a death sentence for Hokkaido Takushoku Bank which had barely survived with a sustained flow of funds from the interbank market. The bank collapsed on 17 November, only 2 weeks after the Sanyo’s failure. The Hokkaido Takushoku case marked the first distress of city * Corresponding author. Tel.: +61 2 6125 3363; fax: +61 2 6125 5124. E-mail address: [email protected] (A. Asano). 1049-0078/$ – see front matter # 2007 Elsevier Inc. All rights reserved. doi:10.1016/j.asieco.2007.07.008

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banks in Japan. It was followed by the bankruptcy of one of the big four securities companies, Yamaichi Securities on 24 November. Then, Tokuyo City Bank failed on 26 November. Rapidly spreading failures raised the concerns about the stability of the financial system among depositors leading to bank runs. An official of the MOF confessed later that he felt as if the Japanese financial system was melting down (Karube & Nishino, 1999). Thereafter, the government was forced to change its stance on banking sector problems from ad hoc approaches to a systematic one under the new comprehensive safety net.1 This paper is motivated by a rather puzzling response by the Ministry of Finance (the MOF) to the financial crisis. Although the MOF was well informed of the potential risk of a financial crisis, and was also aware of the insufficiency of the existing safety mechanism, in advance of the materialisation of the financial crisis in November 1997, it was reluctant in building up a more comprehensive and robust safety net to deal with it.2 After the bubble burst in the beginning of the 1990s, a financial crisis became more likely with an increasing possibility of large-scale financial institution failures, and also in the early 1990s, there were already some signs of financial instability. Nonetheless, the MOF did not attempt to build up a robust safety framework that would cope with the failures of big banks, but rather played for time by obscuring the extent of the problem. Meanwhile, the MOF adhered to the traditional ad hoc approach, i.e. it arranged behind closed doors a rescue package for troubled financial institutions by getting the assistance of other healthy financial institutions. In fact, even after the crisis in November 1997 the MOF was still half-hearted in taking any new approaches to the increasing financial instability. The MOF stuck to its traditional policy and made an attempt again to save two insolvent long-term credit banks with financial support from other healthy banks in 1998.3 The MOFs rescue plan was actively discussed in the Diet. During the session, the public began to realise that the MOFs approach was inappropriate for managing the unprecedented financial problem in Japan. Urgent and decisive action by the government was needed to manage the crisis of the financial system. Priority was given to establishing a robust crisis management mechanism: a capital injection scheme; a nationalisation procedure for failed banks; and a bridge bank to protect healthy borrowers from their lenders’ failure. The Diet took the lead and passed the ‘‘Financial Reconstruction Act’’ in June 1998. This legislation enabled the government to treat systemic risk in the financial industry more consistently under clear rules and procedures. The above brief overview shows how organisational inertia was at work in the MOF. Although the MOF had several chances to change its policy in response to the financial crisis, it continued to persist with its conventional policy. In this paper, motivated by this observation, we address the following questions. Why could the MOF not play a leading role in the build up of a better safety net even though the crisis was easily anticipated after the bubble burst? Why did the MOF stick to the traditional wait and see approach? In other words, what caused the MOF to be reluctant to change its old-fashioned approach to a new one despite the rapid development of banking sector problems? In order to answer these questions, we suggest a theoretical model where the career concerns of officials play an important role. In our model, a bureau of a hierarchical government organisation is responsible for overseeing the banking industry. We show that the career concerns of officials generate organisational inertia in the sense that, regardless of changes to the

1

Nakaso (2001) explains the development of the safety net in the financial system in Japan. In the early 1990s, the MOF was aware that the Deposit Insurance Corporation (the DIC) was not sufficiently funded and was only able to manage sporadic failures of small financial institutions. See Nakaso (2001) for the details. 3 See Nishino (2001) for the process of the legislation. 2

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environment, a new official prefers to choose the same policy taken by a former official. We also conduct a case study and investigate whether our model fits the experience of the Japanese economy in the 1990s. Organisational inertia seems to have dominated the MOF in most of the 1990s. However, if we take a close look at the behaviour of the MOF, we recognise that there was a short period in which the MOF made the best possible effort to change its policy stance and tackle financial sector problems. Unfortunately, it failed in midstream due to a series of unexpected incidents. We take two senior officials of the banking bureau of the MOF in the early 1990s, and contrast their policies toward financial problems to determine why the MOF failed to respond quickly to mounting risks in the financial industry. Our paper contains several features that are distinct from the other relevant literature. First, in the literature, organisational inertia usually implies organisations that do not change their organisational structure.4 In this paper, we offer a theoretical framework that focuses on agents’ career concerns to explain organisations’ tendency in adhering to certain policies. Second, in terms of modelling the career concerns, we focus on the interaction of two career-concerned managers, as opposed to only a single manager’s career concerns that much of the literature studies (Dewatripont, Jewitt, & Tirole, 1999a, 1999b, Persson & Tabellini, 2000, Tirole, 1994). Our model hence allows us to analyse an interesting situation in which ‘bad managers drive away good managers.’ Finally, whilst much of the literature on the financial crisis in the 1990s Japan simply points out that the government did not behave appropriately, our investigation that incorporates the policy decision process and the organisational structure enables us to answer why the policy change may not have occurred. The remainder of the paper is structured as follows. In Section 2 an overview of our model is provided. The timing of the events and each official’s objective functions will be specified. We solve for the solution using backward induction in Section 3. It will be shown that the interaction between the career-concerned officers may lead to a suboptimal policy choice. In Section 4, a case study will be conducted to check the veracity of our model. Section 5 concludes. 2. Model 2.1. Overview: timing of events Consider an organisation with a hierarchical structure that performs multiple tasks including regulation of the banking industry: we will call it ‘‘the Ministry.’’ The Ministry has a vertical structure: the minister at the top of the hierarchy, a senior official in the middle, and junior officials at the bottom. The minister directs the senior official who is responsible for the coordination of policymaking across the bureaus of the Ministry. Junior officials perform tasks assigned to each bureau. The senior official also gives advice about who is to be the next senior official to the secretariat of the Ministry. The secretariat is responsible for various personnel matters: the arrangement of the officials’ post-retirement jobs, the promotion of junior officials, and the employment of new junior officials, and so forth.5 To simplify our analysis, we assume that each bureau is comprised of only one junior official. So, we identify a junior official with the 4 Hence it is known to structural inertia. Colombo and Delmastro (2002) conduct a succinct survey of the related literature for instance. 5 In Japan the secretariat of each ministry is in charge of personnel management of their career officials (Inatsugu, 1996). The arrangement of post-retirement jobs is one of the important tasks for the secretariat (Mukaidani and Jounalists, 1996).

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bureau that he or she belongs to. The Ministry has the banking bureau to regulate and oversees the banking industry. At the beginning of Period 1 the Ministry is set up, the minister is appointed, and all its officials, including a senior official, are also newly employed. Prime Minister appoints the minister. The minister has formal authority, but has no real authority.6 That is, the minister has neither the speciality nor relevant information to administer the Ministry, so he simply rubberstamps any decision made by the officials. We assume that the Ministry adopts an internal promotion system except during the time when the Ministry is first established. Hence, the position of the senior official is always occupied by one of the former junior officials from a bureau in the Ministry, and is never taken by an outsider. This assumption reflects the facts and conventional practices of personnel matters in Japanese government organisations. The senior official leaves the Ministry a period later, and all junior officials retire except for the one who is promoted to the senior position. At the end of Period 1 the senior official retires to the postretirement job arranged by the secretariat. Then, one of junior officials in the Ministry is promoted to the senior position whereas the rest of the junior officials retire. New junior officials come into each bureau of the Ministry. We assume that the senior position is taken over by the junior official from the banking bureau since we are interested in the interaction between the senior official from the banking bureau and the bureau’s new junior official. As we stated, the banking bureau of the Ministry supervises the banking industry. A representative bank in the banking industry has a project that lasts three periods. The banking bureau can intervene in the project – it can order the bank to change the project to a safe one – if it wants. When the banking bureau does not intervene in the project – we say that it is ‘‘passive’’ – the expected return of the project itself in Period 1 is a random variable subject to some probability distribution we shall specify shortly. The expected return becomes certain in Period 2 but the actual return is still random if the banking bureau is still ‘‘passive’’ in Period 2. The actual return will eventually be determined in Period 3. On the contrary, if the banking bureau intervenes in the project – we say that it is ‘‘active’’ – the return is determined in the period of the intervention as the project is changed to a safe (riskless) project. That is, if the bureau is ‘‘active’’ in Period 1, then the actual return of the project in Period 3 is determined in Period 1. We denote it by l1. If the bureau is ‘‘active’’ in Period 2, the actual return in Period 3 is determined in Period 2. We denote it by l2. At the end of Period 2 the senior official retires. The new senior official is promoted from the banking bureau and the junior officials of the other bureaus leave the Ministry. At the beginning of Period 3 the project’s actual return is determined if there has not been any intervention in the project. At the end of Period 3, the Ministry closes down and the senior official retires. Table 1 summarises the overview of the model. 2.2. Players There are four different players in this model. 1. A female senior official in Period 1. We denote her by SO1. 2. A male junior official in a banking bureau in Period 1, and will be promoted to the senior position in Period 2. We denote him by JO1 in Period 1 and SO2 in Period 2. 3. A female junior official in a banking bureau in Period 2. We denote her by JO2 and SO3 . 6

See Aghion and Tirole (1997) for formal authority and real authority.

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Table 1 Events Period 1 Ministry The ministry is established Project The expected return of the project is random If the banking bureau is ‘‘active,’’ the return is determined Officials

Period 2 The expected return becomes certain but the actual return is still random If the banking bureau is ‘‘active,’’ the return is determined

Junior official is newly employed in the banking bureau Junior official is newly employed ! Senior official in the banking bureau Senior official is newly employed ! Retirement in the banking bureau

Period 3 The ministry closes down The actual return is realised

! Senior official ! Retirement

4. Secretariat is in charge of personnel management of the officials including the arrangement of post-retirement job. Interactions between a senior official, a junior official and the secretariat in each period are the crucial ingredients of our model. These officials are distinguished by gender only because it makes explanation much clearer than otherwise when they interact with each other. 2.3. Type of JO1 (SO2 ) and the project JO1 ’s type, which we denote by u, is assumed to be unknown in Period 1. That is, even he does not know how good a regulator he is when he has just started working as a junior official.7 We also assume that his type is innate and does not change over time. As explained earlier, a representative bank plans a risky project at the beginning of Period 1. The expected return of the project is determined in the beginning of Period 2, and we denote it by pðuÞ. That is, the expected return depends on SO2 ’s type.8 To make things simple we assume that pðuÞ ¼ uR (R  0) and u are uniformly distributed over a closed interval ½0; 1. Consequently in Period 1 the expected return of the project is random because nobody, including JO1 himself, has observed his type yet. The crucial assumption is the following. When SO2 ’s type is revealed, he and his junior, JO2 , are able to observe it. These two officials know SO2 ’s type, and hence know the expected return of the project as well. However, the secretariat of the Ministry cannot observe SO2 ’s type. This assumption tries to abstract from the reality that there typically exists severe division of labour in the Ministry. Each of the bureaus in the Ministry, instead of operating as a team communicating with other bureaus or the secretariat, is independently conducting their tasks. It appears common that the secretariat does not keep abreast with every bit of information of every bureau. Due to this asymmetric information, interactions between players become complicated but interesting. 7 This is not an unrealistic assumption. It is commonly known that one of the problems of Japanese bureaucrats is that they are not well-trained specialists, but rather generalists. 8 One interpretation of this assumption is perhaps to say that the senior official is influential in determining the state of an economy, which affects the outcome of the project. The state of the world is not explicitly introduced in our model, as it makes the analysis unnecessarily complicated without giving us any additional insight.

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To understand how they interact, we look at what these officials’ objectives are and what decisions they are making. 2.4. Objectives of the players JO1 and JO2 , when they are a junior official, maximise their expected utility: U J ¼ wJ þ E½U S :

(1)

Their utility is made up of the sum of monetary benefit when they are a junior official, wJ , and the expected benefit E½U S  when they are a senior official. For simplicity we assume a unit discount factor throughout. U S takes the following forms: U S ¼ 0 if they do not get promoted to a senior position and U S ¼ wS þ V S þ E½Z otherwise. In the senior position, the utility is derived from three elements: monetary benefit wS , the expected return of the project V S and expected benefits after retirement E½Z. Thus they value not only their private benefit but also social welfare V S .9 If they were benevolent, then their utility would be U J ¼ E½U S  ¼ V S . We assume that SO1 is hired in Period 1 as a senior official but just to make the Ministry function, i.e. to complete the hierarchy, and hence no specific utility function is postulated. 2.5. Interactions between the players Junior officials’ decision is to choose either ‘‘passive’’ or ‘‘active.’’ In Period 1, JO1 chooses either ‘‘passive’’ or ‘‘active’’ without knowing his type. In Period 2, JO2 decides her policy knowing SO2 ’s type. Senior officials give advice to the secretariat about whether or not the junior official is to be promoted to the senior position in the next period. The promotion probability of a junior official is represented by a function of his/her (hence his/her bureau’s) policy choice, ‘‘passive’’ or ‘‘active.’’ In this setup, there exists an incentive for SO2 in Period 2 to manipulate the promotion probability so as to maximise his utility. This is because of the secretariat’s lack of knowledge about the expected return of the project and SO2 ’s type. The secretariat arranges a post-retirement job for SO2 according to his type, but some other information has to be used to estimate it. Here, we make an important assumption that the secretariat has the belief that officials are all benevolent. In other words, whatever the secretariat observes, it conjectures that socially optimal decisions have been made by each official.10 The secretariat assesses the type of the senior official based on this belief and each bureau’s decision. The senior official SO2 has an incentive to be assessed as highly as possible by the secretariat because he wants as much benefit as he can obtain from his post-retirement job. In Period 2, based on the belief that the banking bureau is benevolent, the secretariat conjectures that the expected return of the project uR is greater than that of a riskless project l2 if JO2 is ‘‘passive.’’ Otherwise, the secretariat concludes that the project value is less than l2 .11 Recalling that u represents the type of SO2 , one can see his incentive that stems from the existence of asymmetric information. 9

This is similar to what Boot and Thakor (1993) postulate in their analysis on a self-interested bank regulator. In their model, a regulator cares about his personal reputation as well as social welfare. 10 Therefore our model focuses on partial equilibrium analysis where only the representative bank is the focus. 11 The information on the riskless project is available to every player including the secretariat.

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With the knowledge of his own type, SO2 can design a scheme for assigning the promotion probabilities of JO2 under which she makes the policy choice in line with his best interests. In our model, we focus on only one project that lasts for three periods and only the type of JO1 is associated with the expected return of it. Hence the secretariat cannot gather any information about the types of other officials, SO1 or JO2. The secretariat also cannot gather any information about JO1 ’s type if he chooses ‘‘active’’ in Period 1 because the value of the project will have been determined in Period 1. When this occurs, we assume that the secretariat recognises JO1 as the average type. We also assume that the secretariat conceives SO1 and JO2 as the average type officials as well. For simplicity, we shall describe the senior official’s post-retirement monetary benefit z as some constant zS > 0 multiplied by his type estimated by the secretariat. Hence if the assessment ¯ his post-retirement monetary benefit is z ¼ uz ¯ S . This implies that SO1 and by the secretariat is u, SO3 will receive z ¼ ð1=2ÞzS after his retirement.12 The next section examines in detail how a senior official, a junior official and the secretariat interact with each other in policy making through their utility maximisation. Our ultimate interest shall be the situation under which JO1 decides to choose ‘‘passive’’ in Period 1, JO2 in Period 2 may be manipulated to choose ‘‘passive’’ as well even when that decision is socially undesirable. 3. The utility maximisation of officials We proceed in solving our model by backward induction. 3.1. Utility maximisation in Period 3 There is no choice problem for the senior official, in Period 3. She receives wS , enjoys the outcome of the project, and has a post-retirement job opportunity where she earns monetary benefit z, which is paid to the average type official. 3.2. Utility maximisation in Period 2 3.2.1. JO2’s decision rule To begin with, we consider the decision-making problem of the junior official of the banking bureau. Let PrðpromotionjpassiveÞ denote the promotion probability if she chooses ‘‘passive’’ and PrðpromotionjactiveÞ if she chooses ‘‘active,’’ respectively.13 The expected return of the project pðuÞ ¼ uR is determined in Period 2. Hence JO2 ’s expected utility in Period 2 is wJ þ PrðpromotionjpassiveÞðwS þ uR þ zÞ; 12

(2)

Recall that the type is uniformly distributed in ½0; 1. This amounts to the assumption that a promotion scheme for the junior official of the banking bureau is independent of other bureaus’ choices. We maintain this assumption from now. Of course, her scheme depends on other bureaus’ policy choices in general. However, there exist some special cases where the promotion scheme for the banking bureau official does not depend on other bureaus’ choices. For example, consider the case that all junior officials are benevolent except for the one in the banking bureau. In this case, the other officials always choose socially optimal policies regardless of their promotion scheme. It is impossible for the senior official to induce them to adopt the senior’s favourite policies by manipulating their promotion prospects. Hence, the senior official has no incentive to relate other bureaus’ policy choices to the promotion prospects of the official of the banking bureau. 13

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if she is ‘‘passive,’’ and wJ þ PrðpromotionjactiveÞðwS þ l2 þ zÞ;

(3)

if she is ‘‘active.’’ She adopts a ‘‘passive’’ policy as long as the value of Expression (2) is greater than that of Expression (3). Comparing these two expressions, we obtain the following lemma. Lemma 1. In Period 2, the junior official of the banking bureau chooses a‘‘passive’’ policy if the following inequality is satisfied, and she chooses an ‘‘active’’ policy otherwise. PrðpromotionjpassiveÞ wS þ l2 þ z  : PrðpromotionjactiveÞ wS þ uR þ z

(4)

This inequality states that, for JO2 to be ‘‘passive,’’ the promotion probabilities’ ratio of ‘‘passive’’ relative to ‘‘active’’ must be greater than or equal to the ratio of the utilities from these two alternative actions. Note that if the LHS of the above inequality is greater than or equal to one for l2  uR (or less than one for l2 > uR), then the decision rule of JO2 is identical with the socially optimal decision rule. However, a self-interested senior official, SO2 , may want her to be ‘‘passive’’ for l2 > uR even though such a decision is not desirable from a socially optimal point of view. The following corollary gives the necessary condition for JO2 to prefer socially undesirable decision. Corollary 1. In Period 2, the junior official may make decisions that are socially suboptimal. That is, when l2 > uR, ‘‘active’’ is socially optimal but he may choose ‘‘passive.’’ PrðpromotionjpassiveÞ > PrðpromotionjactiveÞ is the necessary condition for this to occur. Likewise, if l2  uR, ‘‘passive’’ is socially optimal, but the junior official may choose ‘‘active.’’ The necessary condition for this to occur is PrðpromotionjpassiveÞ  PrðpromotionjactiveÞ. However, if JO2 is benevolent and only concerned with the value of the project, then she always chooses a socially optimal policy whatever the promotion scheme is. Corollary 2. If the junior official of the banking bureau in Period 2 is benevolent, she always makes a socially optimal decision, i.e. ‘‘passive’’ if l2  uR and ‘‘active’’ if l2 > uR whatever the promotion scheme is. 3.2.2. SO2’s decision rule when he is benevolent Given JO2 ’s decision rule, we turn to the problem of SO2 . He assigns promotion probabilities of JO2 , which are contingent on her decision of ‘‘active’’ or ‘‘passive.’’ We first consider the optimal scheme when SO2 wishes to maximise the present value of the bank’s project, i.e. when he is benevolent. In this case, he makes the promotion scheme for JO2 under which she achieves a social optimum. Hence, SO2 sets ðPrðpromotionjpassiveÞ=PrðpromotionjactiveÞÞ  ðwS þ l2 þ z=wS þ uR þ zÞ if l2  uR and vice versa. This discussion and Corollary 2 lead us to Proposition 1 and Corollary 3. Proposition 1. A sufficient condition for the socially optimal decision to be made in Period 2 is that either the senior official or the junior official of the banking bureau is benevolent. It is not necessary that both SO2 and JO2 are benevolent for a socially optimal decision to be made. Even when SO2 is self-interested, he cannot affect a benevolent JO2 thorough her

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promotion scheme because JO2 weighs only the value of the project. Hence the junior official always makes his decision in line with the social optimum. On the other hand, a benevolent SO2 can lead a self-interested junior official JO2 to a socially desirable decision by manipulating her promotion scheme in the way JO2 prefers to choose the socially optimal policy. From the static point of view, it does not matter which official is benevolent. However, the implication is totally different in the dynamics of an organisation. We discuss this issue later in this section. Corollary 3 is the other side of Corollary 2, and states the necessary condition that any promotion scheme by a benevolent official must satisfy in order to induce a junior official’s socially optimal choice. Corollary 3. If l2 > uR, the benevolent senior official never makes a promotion scheme in which PrðpromotionjpassiveÞ is greater than PrðpromotionjactiveÞ. If l2  uR, the benevolent senior official never makes a promotion scheme in which PrðpromotionjpassiveÞ is smaller than PrðpromotionjactiveÞ. 3.2.3. SO2’s decision rule when he is self-interested Next, we consider SO2 ’s utility maximisation problem when he is self-interested, who is concerned not only with the value of the project but also with his benefits from his post-retirement job. As mentioned in Section 2.5, SO2 gets paid according to his (estimated) type, and the secretariat’s assessment on SO2 ’s type is given by EðujpassiveÞ ¼

  u 1 l2 ¯ du ¼ 1þ  u; 2 R ðl2 =RÞ 1  ðl2 =RÞ

Z

1

(5)

if the secretariat observes a ‘‘passive’’ banking bureau, and EðujactiveÞ ¼

Z

ðl2 =RÞ 0

Ru l2  u; du ¼ l2 2R

if it observes ‘‘active.’’ Given this, SO2’s utility in Period 2 is written as   ¯ S ¼ wS þ uR þ 1 1 þ l2 zS ; wS þ uR þ uz 2 R

(6)

(7)

if JO2 chooses ‘‘passive’’ and wS þ l2 þ uzS ¼ wS þ l2 þ

l2 zS ; 2R

(8)

if JO2 chooses ‘‘active.’’ The comparison of these two expressions immediately leads us to Lemma 2. Lemma 2. The senior official prefers the junior official to choose‘‘passive’’ if u  u and prefers him to choose ‘‘active’’ otherwise, where u ¼ max ½0; ð1=RÞðl2  ð1=2ÞzS Þ. If the post-retirement benefit of SO2 zS is relatively large in comparison to the value of the project by ‘‘active’’ policy l2, then u ¼ 0. Corollary 4. If l2  ð1=2ÞzS , the senior official prefers the junior official to choose ‘‘passive’’ regardless of his type.

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In order to force JO2 choose the policy that SO2 prefers, he needs to design the promotion scheme which induces it. From Lemma 1 the banking bureau adopts a ‘‘passive’’ policy if the inequality in the lemma is satisfied, and it adopts an ‘‘active’’ policy otherwise. Thus, SO2 assigns PrðpromotionjpassiveÞ and PrðpromotionjactiveÞ so that the inequality in Lemma 1 is met when u  u , but is not met when u  u . 3.2.4. Organisational inertia We summarise JO2 ’s decision rule in Period 2. Recall that we are considering the case where the banking bureau chose ‘‘passive’’ in Period 1. Lemma 3. Under the promotion scheme set by the senior official, the banking bureau chooses ‘‘passive’’ policy for u  u, i.e. the same policy as in Period 1. The bureau chooses ‘‘active’’ policy for u  u, i.e. different policy from the one in Period 1. Let us examine the implication of the decision rule of the banking bureau on social welfare. After the realisation of u, the expected return of the risky project is uR if it continues, while the return is l2 otherwise. The socially optimal policy choice rule is ‘‘passive’’ if uR  l2 and ‘‘active’’ if uR  l2 . So uC ¼ ðl2 =RÞ is the critical value. uC is greater than u where Du  uC  u ¼ min ððzS =2RÞ; uC Þ. Thus, when uC  u  1 or 0  u  u the banking bureau’s decision is identical to the socially optimal decision rule. However, when u 2 ðu ; uC Þ the banking bureau’s decision deviates from the socially optimal one. The bureau chooses ‘‘passive’’ even though the optimal policy is ‘‘active.’’ With Lemma 3 we have the following proposition. Proposition 2. For u 2 ðu ; uC Þ the senior official sets the promotion probabilities so that PrðpromotionjpassiveÞ > PrðpromotionjactiveÞ. Then, the banking bureau’s decision is ‘‘passive,’’ which is the same policy as in Period 1. This decision is socially suboptimal. Given the decision of ‘‘passive’’ that was made by SO2 in Period 1, a new junior official, JO2 , also continues the project in Period 2 for u 2 ½u ; 1. However, the decision of ‘‘passive’’ in Period 2 is suboptimal for u 2 ½u ; uC . Organisational inertia arises when the condition in Corollary 4 holds. In this case the self-interested JO2 always chooses the same action as was taken in Period 1 by JO1, even though that is not socially desirable. Our discussion has highlighted that this inertia is a product of the interaction between senior and junior officials with career concerns. SO2 has the incentive to pretend to be more competent in order to have a better post-retirement job. This is because his post-retirement job is arranged by the secretariat and his pay depends on the secretariat’s assessment of his type. The more favourably SO2 is evaluated by the secretariat, the higher the monetary benefit he can expect. The secretariat assesses his type through JO2 ’s decision. JO2’s decision making has some relation with the decision made by JO1 in Period 1 (now SO2 in Period 2). Hence, JO2 ’s action in Period 2 conveys some information of SO2 ’s type. However, SO2 can influence JO2 ’s career through his advice to the secretariat. There is room for SO2 to give an incentive to JO2 to behave in the best interests of him, manipulating her promotion scheme. Since she is motivated by getting promoted to a senior position, she is willing to make the decision SO2 desires under the promotion scheme made by him. These strategic interactions between self-interested officials through the personnel system create the source of organisational inertia.

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3.2.5. Lifetime employment, internal promotion and amakudari Two factors strengthen this organisational inertia in Japanese governmental organisations. One is the lifetime employment system and the other is internal promotion. These are wellknown features of Japanese firms, but they are more pronounced in all governmental organisations including ministries and agencies. One of the remarkable personnel practices in government organisations is the arrangement of post-retirement jobs by the secretariat of each ministry.14 In contrast to the United States where retiring government officials find their next job by themselves, in Japan the secretariat backed by the power of the ministry secures many post-retirement positions in various organisations. The allocation of these jobs for retiring officials is considered as one of the most important functions of the secretariat. The arranged post-retirement positions have a prestigious rating that must be equal to the last position of the official within a ministry. Hence, what rank they have ended up with is very important for government officials. This extended lifetime employment system creates strong career concerns and consequent organisational inertia in government organisations. The internal promotion system is widely found in Japan but it takes an extreme form in the government. Each ministry accepts only a small number of new career officials each year. Usually, they come directly from university. Theoretically, whether they are career officials or not, every official has equal opportunity to be promoted to senior positions. However, career officials predominantly occupy most of the senior positions. It is almost impossible for noncareer officials to reach higher positions. This is even more for outsiders. Thus, senior officials tend to have more power to constrain junior officials’ action through their promotion opportunity. In contrast, there is no such incentive in the governmental organisations in the United States because the President appoints senior officials. The sources of organisational inertia are lifetime employment and internal promotion. Although our setting has focused on the MOF, these features are commonly shared in governmental organisations in Japan. Thus, our results are easily extended to other ministries by interpreting the bank’s project as a project in other industries, public work, etc. 3.2.6. Discussion We turn to the implication of the model in terms of the dynamic response of the Ministry to an exogenous shock. As mentioned previously, a socially optimal decision is always made in Period 2 as long as either SO2 or JO2 is benevolent. In this sense, it does not matter which one of them is benevolent, but it does matter when organisational dynamics is concerned. Suppose that SO2 is self-interested. For u 2 ½u ; uC , JO2 , if she is benevolent, prefers ‘‘active’’ while her choice is ‘‘passive’’ if she is self-interested. We know that, for this interval, SO2 prefers ‘‘passive’’ even though ‘‘active’’ is socially optimal. Hence, he assigns a higher probability of promotion to ‘‘passive’’ than ‘‘active.’’ JO2 , if she is benevolent, will choose ‘‘active.’’ On the other hand, if she is self-interested, shewill choose ‘‘passive.’’ Thus, once a self-interested person takes the senior position, a self-interested junior official is more likely to be promoted. Our model, therefore, appears to suggest that there is the likelihood that a phenomenon similar to ‘bad money drives out good money’ occurs in any organisation where internal promotion is prevalent. The fact that this situation does not occur when SO2 is benevolent suggests that whether a senior official is benevolent or not is the critical factor in terms of the dynamics of an organisation. Inadequate policy making in 14

This practice is called amakudari. See Brown (1999) for amakudari and the Ministry of Finance. See also Shiota (1995) and Kishi (1996). Inatsugu (1996) provides a detailed description about the career paths of bureaucrats.

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Japanese governmental organisations has continually been revealed and some ex-bureaucrats attribute this mishandling to the morality of current bureaucrats, saying that they lack a sense of morality as a public servant (for example, Yoshida, 1997). Our model may justify their assertion. 3.3. Utility maximisation in Period 1 The previous subsection has discussed the decision-making problem of the senior official and the junior official in the banking bureau in Period 2. Here we investigate JO1 ’s utility maximisation problem in Period 1.15 We begin with the case where he is benevolent. Then, we consider the case in which he acts in his own interest. 3.3.1. Decision rule for a benevolent junior official In Period 1, the expected return of the bank’s project uR is a random variable and is uniformly distributed between 0 and uR. If JO1 is benevolent and chooses ‘‘passive’’ in Period 1, then from Proposition 1, JO2 makes the socially optimal decision in Period 2, hence the present value of the project is given by V¼

Z 0

uC

l2 du þ

Z

1

uR du ¼ uC

  1 l2 Rþ 2 : 2 R

(9)

If the banking bureau is ‘‘active’’ in Period 1, the value of the project is l1 . Thus, supposing JO1 is benevolent, the decision rule is ‘‘passive’’ if V  l1 and ‘‘active’’ otherwise. 3.3.2. Decision rule for a self-interested junior official In turn, when JO1 is self-interested, his utility is the sum of a monetary benefit in Period 1 and expected benefit in Period 2. Regardless of his decision on ‘‘passive’’ or ‘‘active’’ in Period 1, his monetary benefit in Period 1 is wJ , so it is irrelevant in his decision making. If JO1 chooses to be ‘‘passive,’’ his utility is U J ðpassiveÞ ¼ wJ þ A; where

(10) 

A ¼ PrðpromotionjpassiveÞ wS þ

Z

u 0

      Z 1 l2 1 l2 zS du þ 1þ l2 þ uR þ zS du ; 2 2R R u (11)

and if he is ‘‘active,’’ recalling that the secretariat in Period 2 conceives that JO1 (SO2 in Period 2) is the average type in this event, his utility can be written as   1 U J ðactiveÞ ¼ wJ þ PrðpromotionjactiveÞ wS þ l1 þ zS : (12) 2 3.3.3. Discussion Without the loss of generality, let us assume that SO1 sets PrðpromotionjpassiveÞ ¼ PrðpromotionjactiveÞ ¼ 1, i.e. JO1 gets promoted to the senior position regardless of his action. 15

Recall that the senior official in this period is hired merely to make the Ministry function. Therefore, he plays no particular role in our model.

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Now define: DU J  U J ðpassiveÞ  U J ðactiveÞ ¼ ðV  l1 Þ þ

Z

uC u

1 ðuR  l2 Þ du þ zS ðuC  u Þ: 2

(13)

This is the marginal benefit from choosing ‘‘passive’’ for JO1 in Period 1, which is comprised of three components. The first term of Eq. (13) represents the net social value of the project evaluated at Period 1. If JO1 makes a socially optimal decision in Period 1, this term is positive. The sum of the second and the third terms measures his net private benefits. The second term is an expected loss in social welfare caused by the suboptimal decision made by JO2 in Period 2 who is self-interested. By definition this term is negative. The last term is the net benefit from a post-retirement job, which is clearly positive. The intuition behind Eq. (13) is that, if JO1 is ‘‘active’’ in Period 1, there is no room to manipulate the secretariat’s assessment about him through the choice of JO2 in Period 2. This is because the value of the project is determined in Period 1 and there is no choice problem left in Period 2. However, if JO1 is ‘‘passive’’ in Period 1, he has the chance in Period 2 to manipulate the secretariat’s assessment of him. The same policy choice problem for JO2 remains in Period 2, and SO2 can induce her to make a choice in a way that favours him. This flexibility increases the his benefit in Period 1, compared with the case in which he is ‘‘active’’ in Period 1. The optimal decision for JO1 in Period 1 is determined by the overall sign of the sum of the marginal benefits. Lemma 4. The junior official of the banking bureau chooses ‘‘passive’’ in Period 1 if DU J  0. Otherwise, he chooses ‘‘active.’’ Obviously, JO1 takes a socially optimal action in Period 1 if his net private benefit is zero. Proposition 3. The sufficient condition for the junior official of the banking bureau to take a R uC R1 socially optimal action in Period 1 is u ðl2  uRÞdu þ ð1=2ÞzS ðl2 þ u du  1Þ ¼ 0. Of course, even when his net private benefit is not zero, JO1 might take a socially optimal action in Period 1. For example, in Eq. (13), if V  l1 positive and is greater than R1 R uC u ðl2  uRÞ du þ ð1=2ÞzS ðl2 þ u du  1Þ, the bureau will adopt the optimal policy, ‘‘passive.’’ This is because, in our model, the decision by the bureau is dichotomous – it either chooses ‘‘active’’ or ‘‘passive’’ – hence there is no room to discuss the degree of regulation. However, if the decision variable were continuous, Eq. (13) appears to suggest that the optimal policy would rarely be adopted. If the regulation variable were continuous, the above sufficient condition would also become a necessary condition. That is, unless his net private benefit is zero, he will be either ‘‘more passive’’ or ‘‘more active’’ than the optimal policy. Remark 1. The junior official of the banking bureau acts ‘‘more passively’’ than optimal in Period 1 if his private benefit after retirement through theRsenior position is greater than theRexpected return uC 1 of the project in Period 2, that is, u ðl2  uRÞ du þ ð1=2ÞzS ðl2 þ u du  1Þ > 0. R1 R uC If u ðl2  uRÞ du þ ð1=2ÞzS ðl2 þ u du  1Þ < 0, he acts ‘‘more actively’’ than optimal. 4. Case study We have obtained several results about the decision making of both senior and junior officials with and without career concerns. It is illustrated in our model that benevolent officials, who have

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no career concerns, choose socially optimal policies whilst self-interested officials may choose suboptimal policies in some situations. In this section we provide anecdotal evidence supporting the findings of our model.16 Although not definitive, the evidence we present is suggestive that our model fits reality well. More rigorous econometric testing of the model is particularly difficult given the nature of the problem and the unquantifiable nature of key variables such as ‘career concerns.’ We highlight two senior officials of the banking bureau of the MOF, who took different paths after their retirement. As retiring officials usually do, one senior official took a job arranged by the secretariat of the MOF. In contrast, the other official followed his own path rather than accept the position arranged by the MOF. Observing this fact, we can assume that the latter was less concerned with his career than the former. Otherwise, he would have followed the MOFs practice: the MOF arranges jobs for its retiring officials and they are supposed to accept the jobs. Conveniently, these two officials were faced with the same issues. Hence, we can verify the predictive power of the model by comparing their responses to these issues. 4.1. Two senior officials and their policy issues We focus on the two senior officials in the MOF in the early and mid-1990s: Nobuyuki Teramura and Yoshimasa Nishimura. Teramura was the director general of the banking bureau, or gin’ko kyokucho in Japanese, from July 1992 to June 1994. Nishimura was the next director general and led the banking bureau from July 1994 to June 1996. Teramura entered the MOF in 1961. Teramura spent most of his early years of his career working for the budget bureau and the secretariat. Then, he became the deputy manager of the administration of the banking bureau in 1975. After that, he mainly belonged to the budget bureau and the secretariat until the position of the general director of the banking bureau was given to him in July 1992. Nishimura was accepted by the MOF in 1963, 2 years later than Teramura. After several years of the standard career path for new officials who qualify with first class honours in the official government examinations, Nishimura became the deputy director general of the banking bureau serving from 1989 to 1992. Then, he was the head of the MOFs affiliated research institute. In July 1994 Nishimura took over Teramura as the director general of the banking bureau. Teramura and Nishimura were faced by accumulating bad loan problems in the banking sector following the collapse of asset price bubble. At the beginning of 1990, stock prices suddenly fell after the Nikkei index reached a record high of 38,915 on the last trading day of 1989. Land prices continued to rise for a while after the restriction on lending to the real estate industry was introduced by the MOF in early 1990. However, it was impossible for land prices to keep increasing without an ongoing supply of funds and the real estate market eventually saw a sharp decline in land prices. Real economic activity also peaked in April 1991 and then headed for a recession. The collapse of asset prices had serious implications for all types of banks from small financial institutions including shinkin banks to big ones such as city banks. Financial institutions lent intensively to the real estate industry directly and indirectly through their subsidiaries. A sharp fall in asset prices in the early 1990s turned a substantial share of lending into bad loans since most lending was backed by collateralised land. The banking bureau of the MOF announced in 16

This section is based on the information and the description in Kaneko (1993), Kishi (1996), Nakaso (2001), Nihon Keizai Shinbunsha (2000a, 2000b), and Shiota (1995).

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1992, for the first time since the bubble burst, that the total amount of bad loans in city banks was 7 trillion yen or 1.1% of total lending. The figure was four times higher than the historic post-war average of 0.3%. However, there was general consensus in the market that the bureau underestimated the actual size of bad loans and its released figure did not reflect the actual situation of the banking sector. The markets speculated that the amount of bad loans was at least 10 trillion yen. In the wake of the collapse of assets prices both Teramura and Nishimura, as directors general of the banking bureau of the MOF, were faced by two major policy issues: the solution to the nonperforming loans in the banking sector and the construction of a safety net for a possible financial crisis. These two political issues were closely related each other. In the process of solving bad loan problems it was inevitable that some financial institutions failed. Hence, a robust safety net scheme needed to be set up to avoid the meltdown of the financial system. As a safety net for the financial system, the deposit insurance system was first established in 1971. The revision of Deposit Insurance Law followed the financial deregulation of 1986, which provided the Deposit Insurance Corporation with two options: payoffs and financial assistance. However, it was widely accepted that the new measures would be able to manage only failures of small financial institutions. We investigate how Teramura and Nishimura responded to these issues in the following section. 4.2. Teramura’s case Teramura had several opportunities to take drastic measures to cope with the situation which could have reached, and in fact did reach, crisis point in the financial system. However, Teramura never took advantage of these opportunities. Rather he stuck to the MOFs traditional wait-andsee and case-by-case approaches, and missed the chance to solve the bad loan problems or to improve the safety net system. For example, on 11 August 1992 the Nikkei stock price index fell below 15,000, 60% less than its highest level of 38,915 recorded on 28 December 1989. Prime Minister Kiichi Miyazawa was deeply concerned about the negative implications of asset price deflation on the financial sector as early as the middle of August 1992. His conclusion was a decisive policy implementation to rebuild the fragile financial system. The Prime Minister planned drastic measures: the temporary shutdown of the Tokyo Stock Exchange, the announcement of financial crisis to the public, and a public fund injection to undercapitalised financial institutions and so forth. However, Teramura strongly opposed the plan, asserting that it was too unrealistic.17 More importantly, it contradicted conventional policies taken by the banking bureau. With the MOFs persistent persuasion Miyazawa eventually gave in and his plan was not realised. As an alternative, Teramura proposed quick-fix policies including the change of accounting rules to cover up unrealised losses in financial institutions. The government announced these MOF policies as ‘‘Polices for Financial Administration’’ on 18 August 1992. Another example can be seen in the fact that the MOF ignored the BOJs early warning of potential systemic risks. In late 1992, the BOJ estimated that the amount of bad loans could reach 50 trillion yen in the banking sector if land prices were evaluated at their net present value. The BOJs calculation also suggested that there should be more than 80 insolvent small financial 17

Yoshimasa Nishimura, an ex-director general of the banking bureau of the MOF, admitted in Nishimura (1999) that the MOF was too optimistic about the bad loan problem.

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institutions. The BOJ called on the banking bureau of the MOF to reflect this estimation in its administration of the banking industry. However, junior officials of the banking bureau dismissed the BOJs concerns as ridiculous and never took its estimation seriously. Furthermore they did not try to bring this issue up with Teramura simply because they knew that Teramura did not want to take drastic measures including the use of taxpayers’ money. Only a young official from the BOJ, who was temporarily working for the banking bureau, explained to Teramura the implications of the BOJs assessment of the bad loan problem in the banking system, and urged him to set up the scheme to deal with the potential crisis. Teramura simply ignored his request. Teramura’s attitude toward Jusen trouble also shows his reluctance to any policy changes. Jusen or housing loan corporations were non-bank financial institutions and established in the mid-1970s by banks, securities companies and insurance companies to engage in home mortgage lending. In the 1980s Jusen companies shifted toward real estate developers since banks themselves entered the housing loan markets. This strategy turned out to be a big blunder. After the bubble burst huge non-performing loans were left and most of Jusen companies virtually became insolvent. In turn this caused very serious consequences for many banks providing funds to them. In fact, Nippon credit bank would have gone bankrupt as early as 1993 if the bank had written off all of its bad loans. On 26 February 1993 the banking bureau held a meeting to talk with the banks concerned to discuss how to deal with Nippon Housing Loan, a Jusen company. The banking bureau persuaded the banks to allow the company to survive with interest cuts. After a long and hot discussion all the banks accepted the bureau’s proposal made by Teramura. However, Kunisada, a member of the board of Daiwa Bank attending the meeting, criticized the MOF for imposing an impossible plan based on an unrealistic scenario. Later Yoji Takahashi, a senior inspector of the inspection department of the secretariat of the MOF proposed that the banking bureau should admit the banks’ taxable writing off of their bad loans in Jusen companies. Many banks planned to prepare for the collapse of Jusen companies since the restructuring plan was considered impossible. However, the banking bureau flatly rejected this proposal, insisting that it would contradict the existing restructuring plan. Instead of urging the banks to write off bad loans, the banking bureau prevented the banks from solving their bad loan problems simply because the bureau was afraid that it would lose face. The notable feature of Teramura’s policy stance was adherence to status-quo. Even though risks for the financial system were increasing, he simply attempted to avoid taking drastic measures to manage potential crisis as long as possible. He had good reasons to change the bureau’s policy but he turned his back on the fact and missed opportunities to manage the problems. 4.3. Nishimura’s case Nishimura attempted to change the banking bureau’s conventional policy stance and to introduce a new approach to the troubles in the banking sector after he succeeded Teramura’s position of the general director of the banking bureau in July 1994. The challenges for Nishimura were much the same as Teramura’s: bad loan problems and the build-up of a new safety net. This was not surprising since what Teramura had done was nothing more than quick-fix measures and buying time. Nishimura was deeply concerned that the credibility of the Japanese economy was deteriorating rapidly in the international business world, and was acutely aware that a different solution to Jusen problems must be worked out since the problems were viewed overseas as a symbol of trouble in the financial industry.

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Responding to sharply rising yen and falling stock prices, the government announced the urgent economic policy package on 14 April 1995, which suggested the use of taxpayers’ money to solve the bad loan problems. This was a fundamental departure from the traditional approach taken by the banking bureau. Previously and for a long time, public funds injection was considered a taboo. The bureau had been afraid that it would come under fire. For this reason every scheme for the financial problems had been made under the assumption that no public funds should be spent on bank rescue operations. On 8 June 1995 The MOF released ‘‘Revitalisation of Financial Functions of the Financial System.’’ This announcement also showed another departure from the traditional wait-and-see approach. The announcement stated, ‘Regarding the Jusen problem, if necessary, the MOF will take appropriate measures including the comprehensive review of the current restructuring plan without adhering to traditional approach.’ Implicitly admitting its mistake in dealing with Jusen problems, the banking bureau reconstructed a scheme to settle non-performing loan problems in Jusen companies. During the period when Nishimura was the director general of the banking bureau, major legislative measures were taken, for the first time, to strengthen the existing safety net, which included the amendment of the deposit insurance law. In lifting the payoff cost limit the legislation allowed the financial authorities to work out resolution packages without depending on funds collected from healthy banks. The policy stance of Nishimura was very different from Teramura. Nishimura was active in responding to the problems while Teramura preferred a wait-and-see approach. Under the leadership of Nishimura the banking bureau tried to tackle bad loan problems and the danger of a financial crisis. Throwing away the traditional wait-and-see approach, Nishimura made efforts to find a solution to the Jusen problem by introducing the use of taxpayers’ money and also contributed to the strengthening of the safety net. However, Nishimura failed to build a robust safety net and a scheme to enable the financial authorities to inject public funds into troubled big banks. This is because the injection of public funds into Jusen problems had led to strong public resentment. The criticism was so strong that to mention the injection of taxpayers’ money into banking problems became a political taboo. 4.4. Post-retirement job and policy assessment After leaving the position of the director general of the banking bureau, Teramura worked for another several years in the MOF. His final position was the minister of the National Tax Agency. Then, the position of special adviser for the Japanese Bankers Association was arranged for Teramura by the secretariat of the MOF. For Nishimura the general director was the final position in the MOF. In contrast to Teramura, he found his post-retirement job on his own. This was very much unusual because it is taken for granted in the world of bureaucrats that retiring officials accept their post-retirement job arranged by the secretariat of the MOF. Not following the convention, he took a position as a professor at a major university in Japan. After both retired from the MOF, the former got a job given to him by the secretariat of the MOF whereas the latter refused. In the light of our model, this is unsurprising. We observe strong policy inertia when the former, with career concerns, was in charge of the banking bureau whereas the latter, with no career concerns, tried (but in vain) breaking the inertia. The question as to whether or not the wait-and-see approach was suboptimal in managing the increasing financial instability of the early 1990s is a much more delicate issue. Whilst our paper

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focuses solely on the policy decision aspect, there are other important factors that together constituted the cause of the financial instability. The five factors Cargill (2000) identifies are (1) a rigid financial regime, which includes close relationships among banks, regulatory authorities, and politicians; (2) Bank of Japan’s policy failure – creating too much liquidity in the late 1980s but then tightening monetary policy abruptly – which led to wild fluctuations in asset prices; (3) slow response by the government; (4) lack of support for the government from the taxpayers; and (5) lack of disclosure and transparency by banks. As pointed out by Cargill (2000), each of these factors played their part and had important feedback relationships with other factors. The regulatory authority’s policy inertia was one of the crucial factors, but the banking crisis might not have occurred without the presence of the other factors. More simply put, because we do not have a counterfactual, there is no definite evidence for or against Teranuma’s policy stance. 5. Concluding remarks In this paper, we have proposed a theoretical model where internal promotion, lifetime employment, officials’ concerns for their own private interests and asymmetric information between officials and the secretariat contribute to create policy inertia in a Japanese government organisation. We have shown how officials’ strategic behaviour might lead to suboptimal decision making, i.e. even when the policy change is socially preferred, an organisation might adhere to the initial policy. Some features of our model – internal promotion and lifetime employment – are commonly observed in Japanese organisations, but are not necessarily common elsewhere. Considering that organisational inertia is a common feature of government organisations across the world, a more general model of a government organisation in which policy inertia is generated might be useful since the source of inertia may be different in other countries. Our model nevertheless is applicable to any kind of organisation in any country so long as they share common features with Japanese government organisations. Acknowledgements The authors would like to thank Jenny Corbett, Simon Grant, Akiyoshi Horiuchi, Atsushi Kajii, Phong Ngo, and an anonymous referee for valuable comments and criticism. All errors are ours. References Aghion, P., & Tirole, J. (1997). Formal and real authority in organizations. Journal of Political Economy, 105, 1–29. Boot, A. W. A., & Thakor, A. V. (1993). Self-interested bank regulation. American Economic Review, 83, 206–212. Brown, J. R. (1999). The ministry of finance: Bureaucratic practice and the transformation of Japanese economy. Westport: Quorom Books. Cargill, T. F. (2000). What caused Japan’s banking crisis? In T. Hoshi & H. Patrick (Eds.), Crisis and change in the Japanese financial system (pp. 37–58). Boston: Kluwer Academic Publishers. Colombo, M. G., & Delmastro, M. (2002). The determinants of organizational change and structural inertia: Technological and organizational factors. Journal of Economics and Management Strategy, 11, 595–635. Dewatripont, M., Jewitt, I., & Tirole, J. (1999a). The economics of career concerns. Part I: Comparing information structures. Review of Economic Studies, 66, 183–198.

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