The Korean Economic Forum
Towards Good Corporate Governance: The Role of Market Incentives and Government Policy
Jihong Lee (Seoul National University)
This paper is an attempt to provide a perspective on the economics ofcorporate governance and draw lessons for the current Korean economy. Fromthe classic agency theory framework, we identify the credit rationing problemdue to asymmetric information and discuss various market responses, includingreputation effects, signaling, and monitoring. The role of competition and familyownership is emphasized in promoting implicit market incentives to achieve goodcorporate governance. While the importance of explicit legal and regulatoryprovisions is recognized, this paper highlights the potential danger of too muchexternal oversight, especially for innovation. As the Korean economy matures,it must strive to strike the right balance between implicit market incentives andexplicit government policy in guiding corporate activities.