KEA RESEARCH

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The Korean Economic Association was launched in Pusan on November, 30, 1952.

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Thank you for your support for the Korean Economic Association (KEA). The KEA has been representing Korean economists for the last 70 years. Now we have about 5,000 members including more than 1,000 life members.

KOREAN JOURNAL OF ECONOMIC STUDIES

Adam Smith’s Ideas of Public Finance and Taxation Reviewed

Kwangsu Kim (Sungkyunkwan University)

Year 2020 / Vol 68 / No 4

We review Adam Smith’s ideas of public finance and taxation in terms of moral philosophical methodology. In the existing literature Smith’s view of taxation is, in cases, inconsistent especially owing to the shortcomings of his economic theory. This paper presents that via his concepts of general equilibrium in price theory and equity in justice, Smith’s maxim of horizontal equality calls for the taxes of rent, interest, monopoly profits, and luxuries as optimal bases, with wages and net profits exempt from tax. Furthermore, the equity-based tax policy bears implications on the redistribution function of the modern state.

Litigation Contests with Objective Merits of the Case: Unobservable Contingent Fee Contract

Pan Sang Kang (Seoul National University) and Dongwoo Lee (Southwestern University of Finance and Economics)

Year 2020 / Vol 68 / No 4

We study litigation contests under the contingent fee and the legal expenses insurance regimes when (1) there are objective merits of the case and (2) the contingent fee contract is not observable to the rival party. We first show that the contract disclosure results in lower contingent fee, which decreases the total effort level. As a consequence, the litigants' expected payoffs increase where as the expected payoff of the plaintiff's lawyer decreases. We next provide a condition under which the plaintiff prefers the legal insurance regime over the contingent fee regime. Finally, we demonstrate that the contingent fee regime always induces a lower total effort level than the legal insurance regime.

The Difference in Health Care Utilization between Self-Employed and Wage-and-Salary Workers: Focusing on the Opportunity Cost of Time

Suzie Ahn (Seoul National University)

Year 2020 / Vol 68 / No 4

This study shows that the difference in opportunity costs between self-employed and permanent wage-and-salary workers is one of the main factors contributing to socioeconomic inequalities in health care utilization. The positive income effect on health care utilization is shown to be significantly smaller for self-employed than for wage-and-salary workers. Since working hours are directly related to the income for self-employed workers, it is more costly for them to use health care services at the expense of working hours than for wage-and-salary workers. For similar reasons, even among wage-and-salary workers, those who lack access to paid leave tend to reduce their health care utilization as self-employed workers do. Furthermore, I investigate the changes in patterns of health care utilization for self-employed workers whose spouses are also self-employed so that the loss of working hours can be somewhat mitigated, and find that there are no significant differences in the use of health care services between those and wage-and-salary workers.

KOREAN ECONOMIC REVIEW

Burdens of Proof and Judicial Errors in Civil Litigation

Jeong-Yoo Kim (Kyung Hee University)

Year 2021 / Vol 37 / No 1

This paper considers the effect of whether burden of proof is assigned to plaintiffs or defendants in tort claims on the defendant’s care-taking incentive under the possibility of judicial error. We argue that it is socially better to place burden of proof on the plaintiff if the proof costs of both parties are low and the evidence is very accurate, thus reducing the wasteful incentive for defendants to commit over-precaution. If the burden of proof is placed on the defendant, it exacerbates the defendant’s over-precaution due to an accident avoidance effect whereby the defendant is incentivized to take more care to avoid an accident, thereby saving evidence costs. We also discuss the sine qua non rule in the case ofnoisy evidence and reconfirm the accident-avoidance effect. This is compared to the result of Gómez (2002).

Impacts of Liquidity Preference on Loan-to-Deposit Ratio and Regional Economic Growth: A Post-Keynesian View

Wonik Park (Gyeonggi Research Institute) and Byoungkil Min (Chungnam National University)

Year 2021 / Vol 37 / No 1

In this study, we analyze the loan-to-deposit ratios (LDRs) and regional economic growth from the perspectives of Post-Keynesian endogenous money theory and liquidity preference theory. We also discover policy implications from the simulation results of a stock-flow consistent model. Contrary to the interpretation of exogenous money theory, we find that a low LDR in a region implies a high level of economic activity. Furthermore,regional economic gaps may emerge through the differences in the liquidity preferences of regions, that is, the liquidity preference differences among regions may lead to differences in various economic behavior, such as willingness to lend, investment propensity, and consumption propensity, which may exacerbate the regional economic gap. Therefore, regional finance should be examined from the perspectives of endogenous money theory and Keynesian theory of liquidity preference. 

Payments Systems, Liquidity, Collateral, and Central Banking

Hyung Sun Choi (Kyung Hee University)

Year 2021 / Vol 37 / No 1

A monetary model is constructed to explore the risk-sharing role of gross settlement as a determinant of money demand for consumption in a credit economy. Due to a deferred payment system, the costs of gross and net settlement are sensitive to the nominal interest rate. Gross settlement may dampen a consumption loss against interest-rate risk arising from inflation by acquiring additional cash from a financial market. Hence, it is optimal for the government to influence inflation and to drive net settlement out of a payment system. For payment policy, the optimal collateral requirement ratio is one whereas for monetary policy the optimal money growth rate is infinity. Payment policy can be a useful alternative to monetary policy. 

KOREAN ECONOMIC FORUM

An Evaluation of the Reform and Opening of the North Korean Economy in the Kim Jong-un Era

Dongho Jo (Ewha Womans University)

Year 2021 / Vol 13 / No 4

Since taking power, Kim Jong-un has continued to pursue new economic policies and measures. In terms of slogans symbolizing his era, he put forward ‘byungjin’ which means simultaneous development of the economy and nuclear weapons, abandoning ‘military-first’ of the Kim Jong-il era. In 2018 he went one step further and declared the ‘all-out concentration on socialist economic construction’, which can be called ‘economy-first’. In fact, positive changes such as the utilization of market functions, decentralization of economic decision making, and expansion of special economic zones are observed. It is difficult to say that the North Korean economy has yet to enter a phase of reform and opening, from the standpoint that reform should not be a simple improvement but a fundamental change in the socialist planned economic system itself, represented by privatization and liberalization, and that opening is to upgrade the level of domestic economic system and policies by understanding international standards and acquiring the benefits of international division. North Korea also publicly and officially denies the need for reform and opening. Nevertheless, in terms of directionality, it is assessed that the North Korean economy has already entered a difficult phase to revert. The change towards reform and opening itself is not a matter of choice, but only a matter of scope and speed.

Changes in Economic Conditions Under COVID-19 and the Effects of Fiscal Policy

Soyoung Kim (Seoul National University) and Yonggun Kim (Seoul National University)

Year 2021 / Vol 13 / No 4

This paper briefly reviews the effectiveness of fiscal policy under low interest rates and the effects of fiscal policy under alternative financing methods, and discusses implications for the Korean economy. Previous studies suggested that an increase in government spending at zero lower bound could have a greater effect on the economy by raising inflation expectations and lowering real interest rates. This result can vary depending on a variety of factors, including the types of shocks and fiscal policy. In the case of the COVID-19, not only the demand side but also the supply side and the psychological side are causing overall difficulties in economic activities. So even if the policy rate reaches the effective lower bound, there is a limit to apply the results of existing studies on the premise of a demand shock. In addition, the effect of fiscal policy may be weaker than usual because economic activities are limited under the COVID-19. A structural VAR model using Korean data developed in past studies was used to analyze how the effect of government expenditures would change if the method of financing was changed. The results show that government spending has a greater effect on the economy with debt-financing than with tax-financing. However, it should also be noted that the risk premium could rise, which adversely affects the economy in the long run as government debt continues to grow under expansionary fiscal policies with debt-financing.

Equity in the Taxation of Labor and Asset Incomes

Byung Mok Jeon (Korea Institute of Public Finance) and Chul-in Lee (Seoul National University)

Year 2021 / Vol 13 / No 4

This study analyzes the equity in tax burden between labor income and asset income from savings and various forms of asset. The optimal taxation theory supports the validity of capital income taxation. Consideration should be given to macroeconomic stability and the theory supports a single tax rate approach to asset incomes. The estimated tax burden by asset income type and income level is generally higher than labor income in Korea, and the gap among asset income taxes is also found to be significant. We need to moderate high tax burdens and narrow the taxation gap among assets. In particular, the level of taxation on housing investment is very low and needs revision. The redistribution effect at the household level due to taxation of asset income was not significant.