Essays in Memory of Albert Ando
Edited by Lawrence R. Klein
Chapter 10: The Over-Investment Hypothesis
10. 1. The over-investment hypothesis* Fumio Hayashi INTRODUCTION Albert Ando’s last published work (Ando et al. (2003)) may well be the most provocative of all his writings. His thesis, which I call the ‘over-investment hypothesis’, is in stark contrast to the existing hypotheses about the Japanese malaise of the 1990s, all of which claim that corporate investment is less than optimal or just about right. A simple theoretical illustration very brieﬂy described at the end of his paper, meant to explain his empirical ﬁndings, forces us to re-examine the sort of models we may wish to rely on to develop our thoughts. In this chapter, I corroborate his empirical ﬁndings about the Japanese economy and formulate his hypothesis in a dynamic general equilibrium framework. In Section 2, I will summarize Ando’s thesis and the supporting empirical evidence he assembled in his paper. I will then present, in Section 3, some additional corroborating evidence that became available in the latest release of the Japanese National Accounts. In Section 4, I will place his own theoretical illustration of the over-investment hypothesis in an explicit dynamic general equilibrium model. The concluding section, Section 5, will brieﬂy comment on the relevance of the hypothesis to Japan’s lost decade of the 1990s. 2. ANDO’S THESIS The hypothesis that Ando puts forth in Ando et al. (2003) is very clear and simple: the Japanese corporations have over-invested for decades. Excessive investment is of course harmful to shareholders. Ando et al. note that corporate governance...
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