Lawyers, Yakuza and Zombie Firms: A Quasi-Natural Experiment

Abstract

In the aftermath of the bursting of Japan’s “Bubble” economy and the subsequent banking crisis of 1997, we find it is possible to have “too few lawyers”. The decline of extra-legal resolution of financial distress via banks’ suspension of banking transactions leads to an increase in yakuza numbers as “dark side” private ordering increases and there is an increase in loss-making “zombie” firms. Japanese legal reforms in 2002 lead to a significant increase in lawyer numbers. These new lawyers play an economically significant role in reducing the number of “zombie” firms in Japan and the yakuza’s involvement in civil disputes. Using a panel of 47 prefectures we find new lawyers lead to a rise in the dissolution and liquidation of firms and a reduction in the number of loss-making “zombie” firms, as well as a reduction in crimes associated with yakuza involvement in civil dispute resolution.