AN EVOLUTIONARY MODEL OF CORPORATE GOVERNANCE AND EMPLOYMENT CONTRACTS

The purpose of this paper is to consider what determines the differenc es between the combinations of financial and labor systems observed in some large market economies. In the presence of complementarity relat ions between financial and labor systems, we first show that the Ameri can type of financial and labor systems and the Japanese type of finan cial and labor systems coexist. On the basis of the evolutionary appro ach, we then discuss which equilibrium is more plausible for different parameter values of the environment. We also explore how the evolutio nary outcome depends upon changes in the parametric conditions. These evolutionary analyses give an explanation for the transformation of th e Japanese economic system from the market-oriented financial and labo r systems in the prewar era to the main bank and long-term employment systems in the postwar era. J. Japan. Inr. Econ., September 1997, 11(3 ), pp. 403-436. Kyoto Institute of Economic Research, Kyoto University , Ryoto, Japan. (C) 1997 Academic Press.