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Seoul Journal of Economics - Vol. 15 , No. 2
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Seoul Journal of Economics - Vol. 15, No. 2, pp. 295-319
Abbreviation: SJE
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 (iklee@keri.org)

JEL Classification: L1, L6

Abstract

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.

Keywords: Excess capacity, Strategic interaction, Industrial Policy
Acknowledgments

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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