Abstract
This paper investigates how the agency problems have been solved in the Japanese financial system. After discussing two ways of coping with informational imperfection in financial markets, i.e., the market and the hierarchy solution, we focus on the workings of the main bank relationship that can be regarded as one of the hierarchy solutions to evade the informational imperfection. The main bank relationship has been important because of its functions as a ‘delegated monitor’. However, the inflexible nature of the hierarchy solution has led to the underdevelopment of capital markets, which seems a weak point of the Japanese economy.
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