KEA RESEARCH

Introduction & History

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

Greetings

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As President of the Korean Economic Association for 2020, I would like to extend my sincere gratitude to you all for your continued support for our association.

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

A Tale of Two Countries

Kyungsoo Kim (Sungkyunkwan University)

Year 2020 / Vol 13 / No 3

In the last decade, the net foreign assets (NEA) of both Korea and the United States have shown the opposite pattern from the previous decade. Korea’s NEA,which had recorded negative despite the current account surplus (CA), has turned to a positive. Meanwhile, in the United States, there has been a decline in the NEA, that is far less than the CA deficit. These two phenomena can not be viewed as a coincidence and should be explained. First, the change in the NEA pattern took place primarily in external debt (EL) in both countries and was driven by valuation channels. Here, the strong dollar along with the preference for global safe assets due to global financial vulnerabilities seems to have had a major impact on ELs. Second, the rates of return on Korea’s external assets (EA) and US EL has converged. This is because both Korea’s EA and USEL have been rebalanced to high-yield components such as ‘stocks.’ In Korea,the share of ‘direct investments’ and ‘stocks’ increased, which led to an increase in return on EA, while the share of ‘reserves’ decreased significantly. Likewise,the share of ‘stocks’ in US EL increased while the share of ‘other investments’decreased. Increasing demand for risky assets of the center country means that international capital flows motivated by risk diversification are increasing. The paper discusses the policy implication of EA configuration evolving under the current Korea’s foreign exchange system.

A Study on the Announcement Effect of the Report of Change in the Purpose of Bulk-Holding in the Korea Stock Market: Transition of General Investment Purpose

Keun Woo Park and Sang Hee Won (National Pension Fund Management Special Committee), Chong-Hyun Won (National Pension Fund Management Special Committee)

Year 2020 / Vol 13 / No 3

In 2020, a plan to revise the disclosure act of report on bulk holdings was implemented. The purposes of holding stocks in bulk have been subdivided into the simple investment, general investment, and management participation. If shareholders report general investment objectives for investment purposes,shareholder activism is possible. Thus the reported company may have a governance improvement effect. This study analyzed market reactions when changes were made for general investment purposes from simple investment purposes. This study analyzed market reactions when bulk-holding investors made changes for general investment purposes from simple investment purposes. As a result of the analysis, firms that have changed holding objectives have an average abnormal return of 0.4%p from one day before the date of disclosure until one day after the date of disclosure. This effect, if disclosed by the National Pension Service, results in a higher average abnormal return of 0.7 percent Next, we analyzed the investors’ transactions based on the disclosure date. Individual investors’ trade imbalance rises after the disclosure, and institutional investors’ trade imbalance falls. These results seem to be due to individual investors’ expectations for improved corporate governance in the future. Besides, this study shows that a short-term decline in performance may occur five days after the announcement of changes in investment purposes. This study contributes to the literature on the announcement effect of the public pension fund and the literature on governance improvement disclosure through hand-collecting data. On the other hand, this study was conducted shortly after the revision of the act of report on holding stock of bulk was implemented, and there are limitations that lack time series to measure the long-term performance of the announcement effect.

Financial Reform of Transitional Economies and Implications to Inter-Korea Financial Cooperation

E-Sub Choi (KAMCO Research Center) and Yoonsok Lee (Korea Institute of Finance)

Year 2020 / Vol 13 / No 3

This paper analyzes the financial reforms of Eastern Europe, where rapid economic transition took place and the case of China and Vietnam where transition is still in place and draws implications to future Inter-Korea financial cooperation. Financial reform such as introducing two-tier banking systems,establishing stock exchanges, resolving NPL issues, strengthening financial supervision are universal among transitional economies. In the case of Eastern Europe, promoting new entry of banks and seeking large scale financial assistance thru international financial institutions economic reform packages took place. China pursued the reform and open door policy by utilizing special economic zones and using Hong Kong as a means to attract foreign capital.Vietnam introduced various measures to cope with dollarization of the economy.These characteristics of transitional economies give rise to the following implications. First, enhancing the capacity of human financial resources in North Korea is imperative for tackling bad loan issues and calls for the need of Inter-Korea financial cooperation to meet this demand. Second, ideas to assist North Korea’s reform and liberalization thru the use of ‘special economic zones for unification’ are needed. Third, we must contemplate on methods to institutionalize the funds of the underground economy in North Korea via utilizing the South Korean financial markets. Lastly, given that the countries will form a single market in the future, ways to cope with the ‘dollarization’ problem in North Korea should be dealt with.