Hiroshi Osano

Intercorporate shareholdings and corporate control in the Japanese firm

Abstract The purpose of this paper is to specify a formal model that rationalizes the intercorporate shareholdings observed in the Japanese equity market as a mechanism for mutual commitment and risk sharing that creates greater possibilities to resolve managerial myopic problems caused by the threat of external takeovers. We show that, under certain conditions, all agents including the existing shareholders of the firm are strictly better off when participating in an implicit contract associated with intercorporate shareholdings. The results also suggest that intercorporate ownership raises the stock prices of the member firms.

Implicit Contracts in the Japanese Bank Loan Market

The implicit contract theory explored by Azariadis [2] suggests that wage rigidity and underemployment are explained by the microeconomic optimizing behavior of each agent in the labor market. In this theory, the former phenomenon is interpreted as risk-sharing arrangements between firms and workers, whereas the latter may occur when workers have the opportunity to use leisure or unemployment insurance benefits.

Managerial compensation contract and bank bailout policy

Abstract Under the incomplete contract framework, we consider an optimal regulatory policy for motivating bank equity owners and bank managers to restructure the bad loans of their banks in the presence of managerial compensation contracts with stock options. The regulatory policy studied in this paper is mainly concerned with the design of repayment schedules in the scheme of injection of cash funds into insolvent banks by the regulator. We show that the regulator cannot necessarily attain the social optimal allocation by injecting cash funds into insolvent banks through the purchase of subordinated bonds with the risk-free interest rate. However, even in that case, we also suggest that, if the regulator injects cash funds into active restructuring banks through the purchase of subordinated bonds or preferred stocks with less stringent repayment conditions and nationalizes passive restructuring banks, the regulator can attain the social optimal allocation by performing such a non-linear injection scheme under certain conditions.

Testing between Competing Models of Real Business Cycles

This paper tests a real business cycle model with efficient long-term labor contracts (the efficient long-term contract model) against a standard real business cycle model (the intertemporal substitution model). In the former model, employment and real wages are determined by bilateral dynamic bargaining between firms and workers. In the latter model, employment and real wages are determined instead by the dynamic optimization of households within the competitive market framework. The authors estimate each model using aggregate Japanese data. Their results show that the data are consistent with the efficient long-term contract model, but are inconsistent with the intertemporal substitution model. Copyright 1991 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Moral hazard and renegotiation in multi-agent incentive contracts when each agent makes a renegotiation offer

Abstract The purpose of this paper is to explore a mechanism for implementing the desired equilibrium actions in the one-principal, multi-agent model with renegotiation when each agent is allowed to make a renegotiation offer. With some belief restriction, we show that there exists a mechanism in which the second-best strategy is always implemented.

Credit rationing and implicit contract theory: An empirical study

Abstract This paper investigate whether or not implicit contract relations predominate in the Japanese bank loan market and produce equilibrium credit rationing. The empirical evidence suggests that risks are shared between banks and firms through interest rate arrangements. This implies that commercial banks in Japan operate in a market dominated by implicit contract relations. However, the evidence does not support the view that Japanese commercial banks execute credit rationing in the sense of Fried and Howitt (1980). Furthermore, the results show that large banks differ from small banks in the risk consideration of loan contracts. These empirical results are completely consistent with the intermarket business group hypothesis such that the group formation aims to share risks and profits among members.

Partial Ownership and Strategic Alliances with Reallocation of Corporate Resources

This paper considers the role of equity transfer to strategic alliance partners in mitigating the moral-hazard problem that occurs if a participating firm faces some possibility of reallocating a part of the resources devoted to the joint project of the strategic alliance or retreating from the strategic alliance before completing the joint project. I derive a situation in which equity transfer in the strategic alliance is a component of an optimal contract, in particular, in which equity transfer in the strategic alliance is superior to the contract with the cash transfer only. I also analyze optimal equity stake sizes.

Default and Renegotiation in Financial Distress in the Multiple Bank Model: An Analysis of the Main Bank System

This paper explores whether the “main bank system” in Japan can be explained by a self-enforcing mechanism that motivates delegated monitorin g creditors to be committed not to execute inefficient liquidation even though all agents are risk-neutral. Using a multiple bank model, we specify a standard debt contract equilibrium in which the delegated monitoring creditor does not care about her reputation, and a main bank contract equilibrium in which the delegated monitoring creditor will attempt to honour the loan contract so as not to destroy her reputation. The results show that, under certain conditions, any equilibrium standard debt contract is dominated by an equilibrium main bank contract in which the debtor and the delegated monitoring creditor are strictly better off. Furthermore, the equilibrium main bank contract reflects the prominent features observed in actual bank loan contracts in Japan. JEL Classification Numbers: D82, G21, G33, G34

Incentive Transfer Schemes with Marketable and Nonmarketable Public Services

We examine an incentive transfer scheme in an executive agency system when there are both marketable and nonmarketable public services. We show that because of the incentive transfer scheme, which contributes to the elimination of a governments budget deficit, social welfare is higher in the executive agency system than in a traditional system when the shadow cost of public funds is large. In addition, the scheme is desirable from a welfare viewpoint when the marketable and nonmarketable public services are complements, or when the production technology exhibits a high degree of cost complementarity.

Nonrecourse financing and securitization

We consider the role of the nonrecourse financing of securitization by a financial institution (FI). Our model suggests that even though the FI has the opportunity to provide liquidity support afterward, it is optimal for the FI to use the nonrecourse financing of securitization initially, because the nonrecourse security makes liquidation of the original asset more attractive for an FI that knows that the original asset is bad. However, our model also predicts that the nonrecourse financing of securitization, together with short-term maturity financing, forces the financial system to perform inefficiently in handling troubled loans and causes problems with inefficient liquidity support and overinvestment under certain conditions, despite the nonrecourse property of securitization. The theoretical results provide empirical implications for recent problems with securitized and structured finance in the United States and Europe.