2017 Reports

Are Picked-up Losers Really Losers?: Evidence from Scrapping Policies in the Japanese Spinning Industry, 1965-79

Korenaga, Takafumi

Scrapping policy induces or forces firms to dismantle and dispose of “excessive” machines, and was a typical policy tool for depressed or declining industries in postwar Japan. This paper examines the effects of this policy on the Japanese spinning industry from 1965-79 using firm-level data. After clarifying features in the policy scheme, I first calculated the productivity and (capital) profitability of a specified machine targeted by the scrapping policy by estimating the production function with data from the production stage. Then, several forms of (dis)investment functions were estimated to examine the direct effect on investment under policy implementation and the indirect effect on post-policy investment through the firm’s revelation of the expected long-term return on investment. The former effect crucially depended upon whether scrapping was compulsory or voluntary, as well as on the coverage of targeted machines. Compulsory scrapping distorted a firm’s investment decisions more than voluntary scrapping. Regarding the latter effect, firms picked up by voluntary scrapping in a certain period were shown to be losers still investing less or disinvesting in the post- treatment period. Firm exits also had a certain role in cutting down the unprofitable machines. Distortions by another related policy (a scrap-and-build constraint on investment) was also observed. As a result, this skillfully-designed policy scheme was, on the whole, far from a welfare-enhancing scheme.