Implicit Contracts, the Great Depression, and Institutional Change: A Comparative Analysis of U.S. and Japanese Employment Relations, 1920–1940

Abstract

This article combines a game-theoretic framework and a comparative analysis to study the impact of the Great Depression on private welfare capitalism. Recharacterizing welfare capitalism as an implicit-contract equilibrium, the article documents parallel institutional developments in the United States and Japan in the 1920s and the process of bifurcation thereafter. In the United States, the breach of contract by major employers induced by the depression led to the rise of explicit contracts and legal enforcement institutions. By contrast, the less severe depression in Japan allowed the maintenance of implicit contracts and the formation of complementary labor laws.This article is partly based on my doctoral dissertation. I am deeply indebted to my thesis advisors, Avner Greif, Gavin Wright, Masahiko Aoki, and John Pencavel. I am grateful to Lee Alston, Carliss Baldwin, Samuel Bowles, Adam Brandenburger, Loren Brandt, Amit Bubna, Louis Cain, David Fairris, Joe Ferrie, Price Fishback, Robert Gibbons, Claudia Goldin, Rakesh Kurana, Robert Margo, Jim Minifie, Joel Mokyr, Laura Owen, Ben Polak, Daniel Raff, Paul Rhode, William Tsutsui, Warren Whatley, and two anonymous referees for their valuable comments.