IDEAS home Printed from
   My bibliography  Save this article

Chaebol and Catastrophe: A New View of the Korean Business Groups and Their Role in the Financial Crisis


  • Robert C. Feenstra

    (Department of Economics One Shields Avenue University of California Davis, CA 95616)

  • Gary G. Hamilton

    (Department of Sociology Box 353340 University of Washington Seattle, WA 98195)

  • Eun Mie Lim

    (Department of Sociology Box 353340 University of Washington Seattle, WA 98195)


We present a model of industrial organization that has multiple stable equilibria and argue that the high-concentration equilibrium describes Korea's economy and the low-concentration equilibrium describes Taiwan's economy. Past industrial policy of the state may have put Korea's economy in the high-concentration equilibrium, but discontinuation of the policy did not cause the industrial organization to change because this is an economically viable equilibrium.The high-concentration equilibrium produces a narrower range of final goods than the low-concentration equilibrium, which explains why the 1996 collapse in semiconductor prices caused the less diversified Korean economy to contract more than the more diversified Taiwanese economy. More importantly, this collapse in demand caused Korea's economy to move to a new equilibrium that has a smaller number of business groups, as evidenced by the collapse of the second-tier chaebol and their absorption into the first-tier chaebol. This wave of bankruptcies, combined with the financially precarious state of the merchant banks, created an investor panic that precipitated the crisis, which began with the 17 November 1997 devaluation of the won. This is why economic fundamentals could explain the chaebol bankruptcies before that date and not those after that date. The logic of our model suggests that public policy should focus on reducing the vertical linkages within business groups and not on reducing their horizontal linkages as the current "Big Deal" program of the government is doing. Copyright (c) 2002 Center for International Development at Harvard University and Massachusetts Institute of Technology.

Suggested Citation

  • Robert C. Feenstra & Gary G. Hamilton & Eun Mie Lim, 2002. "Chaebol and Catastrophe: A New View of the Korean Business Groups and Their Role in the Financial Crisis," Asian Economic Papers, MIT Press, vol. 1(2), pages 1-45.
  • Handle: RePEc:tpr:asiaec:v:1:y:2002:i:2:p:1-45

    Download full text from publisher

    File URL:
    File Function: link to full text
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Kineung Choo & Keun Lee & Keunkwan Ryu & Jungmo Yoon, 2009. "Changing Performance of Business Groups over Two Decades: Technological Capabilities and Investment Inefficiency in Korean Chaebols," Economic Development and Cultural Change, University of Chicago Press, vol. 57(2), pages 359-386, January.
    2. Prachi Mishra & Raghuram G. Rajan, 2016. "Rules of the Monetary Game," Working Papers id:10533, eSocialSciences.
    3. repec:eee:jmacro:v:52:y:2017:i:c:p:135-146 is not listed on IDEAS

    More about this item


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:tpr:asiaec:v:1:y:2002:i:2:p:1-45. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kristin Waites). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.