Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 15, No. 2, pp.295-319
ISSN: 1225-0279 (Print)
Print publication date 31 May 2002
Received 29 Aug 2002 Revised 18 Dec 2002

Government-Led Restructuring of Firms' Excess Capacity and Its Limits: Korean “Big Deal” Case

In Kwon Lee
Research Fellow, Center for Law and Economics, Korea Economic Research Institute, FKI Building, 28-1, Yoido-Dong, Yeongdungpo-Ku, Seoul, 150-756, Korea, Tel: +82-2-3771-0033

JEL Classification: L1, L6


Based on the statistical analysis of a panel data composed of 26 Korean Big Deal-related firms' financial information over the sample period of 1988-98, this paper rigorously examines which factors determine the scale of excess capacity. The statistical analysis in this study demonstrates that a firm's strategic decision to maximize profits subject to the constraints existing in its business environment may be a rational behavior at the firm level even if it may bring about excess capacity at the industry level ex-post. Statistical results imply that government-led resource allocation, such as the “Big Deals,” has limits in its function and effectiveness because government can not ex ante control firm's strategic behaviors.


Excess capacity, Strategic interaction, Industrial Policy


This paper was presented at the 2002 Seoul Journal of Economics international symposium. I really appreciate the illuminating comments and suggestions of Sang-Seung Yi and seminar participants. The views contained in the paper are not purported to reflect those of Korea Economic Research Institute.


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