Winners, losers, and efficiency: Achieving multiple goals in Japan's financial system reforms

Abstract

When giving policy advice, economists often proceed as if efficiency is the only valid social goal. Although efficiency is important, we argue that single‐minded pursuit of it is counterproductive. It unnecessarily erects political hurdles to the enactment of efficiency‐enhancing reforms because policy proposals that ignore valid, nonefficiency concerns are more likely to meet political and bureaucratic resistance. Moreover, such resistance may be avoided. A number of design principals can be employed to craft proposals that address political goals without abandoning efficiency. We describe three classes of principles: creative design of market mechanisms, maintenance of marginal incentives, and compensation for losers. We then illustrate their practical application in the context of Japanese financial‐sector deregulation. This policy area usefully illustrates the importance of considering multiple goals in policy design. While efficiency is a frequently expressed goal, Japan's continued policy paralysis indicates that the bureaucratic and political goals of major stakeholders make the straightforward deregulation of financial markets difficult to achieve. We do not purport to resolve the entrenched barriers to economic reform in Japan, but to the extent that we identify and address valid nonefficiency goals, the conclusions of the analysis are relevant.