J. Mark Ramseyer

Formal judicial procedures and informal community sanctions function as substitutes, and so too do vertical integration and contracts. Sometimes, firms enforce contracts through the courts -- but not all parties have the assets that would make them susceptible to judicial enforcement. Sometimes, firms enforce them through informal mechanisms -- but not all parties live within worlds bound together by dense networks of social ties or reputational intermediaries. When firms find both formal and informal mechanisms too limited, sometimes they integrate vertically instead. Integration can substitute, in other words, for cross-firm contracting where the possibilities of judicial and reputational enforcement are weak. I illustrate this dynamic with an example from the turn-of-the (last) century Japanese coal industry. Given that entrepreneurs lacked actual mining experience, they hired seasoned miners to supervise their teams of miners. Given that they lacked the experience necessary to supervise these supervisors, they placed the supervisors in independent firms and generated the information they needed by sponsoring tournaments among them. The structure did not work. Even the senior supervising miners had little property amenable to judicial enforcement, and worked in mountain communities notoriously devoid of the tight social networks typical of cohesive agricultural communities. Facing multiple disasters caused by out-of-control miners, the mining firms brought their monitoring in-house.

Over the last century, Japanese consumers have steadily lost their taste for sake. Several large producers dominate the mass market through economies of scale, but the regional brewers have gradually gone out of business. In this environment, a small group of enterprising regional brewers began to create a market for premium sake with the environmental variations so important to French terroir.To produce this terroir sake, brewers must convince local farmers to grow high-risk and high-cost varieties of rice optimized for premium sake. The challenge involves unusually complex incentive and informational requirements. Yet the parties almost never draft elaborate contracts with verifiable terms, and rarely vertically integrate. Instead, they build dense and refined networks of social capital among themselves and combine short-term renewable (and hence terminable) contracts, extremely high (efficiency-wage level) prices, and close monitoring by the brewer. In the process, they give the farmers strong incentives to let the brewers intervene as needed in the farming.The brewers and farmers neither draft elaborate contracts nor vertically integrate for a simple reason: they do not need to do so. The combination of dense networks of social capital, terminable short-term contracts, and high prices gives them all the flexibility they need.

Using 14 national censuses and a wide variety of first-hand accounts, I trace the creation of a largely fictive identity for Japan’s putative outcastes and the transformation of their nominal human rights organization into (on several crucial dimensions) a heavily criminal extortion machine. Scholars have long described the outcastes – the “burakumin” – as descended from a pre-modern leather-workers’ guild. Their members suffer discrimination because their ancestors handled carcasses, and ran afoul of a traditional Japanese obsession with ritual purity.In fact, most burakumin are descended not from leather-workers, but from poor farmers with distinctively dysfunctional norms. Others may or may not have shunned them out of concern for purity, but they certainly would have shunned many of them for their involvement in crime and their disintegrating family structures.The modern transformation of the buraku began in 1922, when self-described Bolsheviks lauched a buraku “liberation” organization. To fit the group within Marxist historical schema, they invented for it the fictive identity as a leather-workers’ guild that continues to this day. Bitter identity politics followed. Within a few years, criminal entrepreneurs hijacked the new organization, and pioneered a shakedown strategy that coupled violent accusations of bias with demands for massive amounts of money. Selective out-migration and spiraling levels of public subsidies ensued. The logic follows straightforwardly from the economic logic outlined by Becker and Hirschman: given ever-larger amounts of (expropriable) subsidies, burakumin with the lowest opportunity costs faced ever-larger incentives to stay in the buraku and invest in criminal careers; given the virulent public hostility that this strategy generated, those burakumin with the highest legitimate career options abandoned the community and merged into the general public instead.

In 1969, Japan launched a massive subsidy program for the “burakumin” outcastes. The subsidies attracted the mob, and the higher incomes now available through organized crime attracted many burakumin. Thus, the subsidies gave new support to the tendency many Japanese already had to equate the burakumin with the mob. The government ended the subsidies in 2002. We explore the effect of the termination by merging 30 years of municipality data with a long‐suppressed 1936 census of burakumin neighborhoods. We find that out‐migration from municipalities with more burakumin increased after the end of the program. Apparently, the subsidies restrained young burakumin from joining mainstream society. We also find that despite the end of government‐subsidized amenities, once the subsidies neared their end, real estate prices rose in municipalities with burakumin neighborhoods. With the subsidies gone and the mob in retreat, other Japanese found the formerly burakumin communities increasingly attractive places to live.

Nuclear reactors entail massive nontransferrable site‐specific investments. The resulting appropriable quasi‐rents offer the mob a lucrative target. In exchange for large fees, it can either promise to “protect” the utility (and silence the reactor's local opponents) or “extort” from it (and desist from inciting those opponents). Using prefecture‐level Japanese panel data covering the years 1980 to 2010, I find that extortion rates rise when a utility announces plans to build a reactor. The evidence is consistent with a straightforward account: once news about a utility's plans to build a new reactor leaks, the mob moves in to appropriate the large quasi‐rents from the utility, and stays to do what it does everywhere else—extort regular payments from local businesses.

Verifiable proxies for social capital potentially provide an empirically tractable way to identify environments where social norms both constrain behavior and substitute for judicial enforcement. Using regression and factor analysis with Japanese prefecture-level data, I explore several aspects of this possibility. I first note that people in prefectures with high levels of social capital more readily comply with a wide range of low-level legal mandates. Conditional on levels of economic welfare, I further find that: (i) firms in prefectures with low levels of social capital are more likely to default on their contracts, (ii) residents in low social-capital prefectures are more likely to litigate, (iii) creditors of distressed debtors in low social-capital prefectures are more likely to petition a court for enforcement orders, and (iv) distressed debtors in low social-capital prefectures are more likely to file in court for bankruptcy protection.