Firm Failure and Financial Crisis

In this paper we try to analyze the link between some industrial policies in South Korea and the 1997 ̄nancial crisis. We argue that while the industrial policies have greatly promoted the development of many local industries, they also have encouraged local ̄rms to get over-optimistic, to over-invest, and to over-produce. That increases the risks the ̄rms are facing. When a bad time occurs, many of the ̄rms will face di±culty. When a su±ciently large number of them have di±culty, their troubles become the troubles of the economy. Thanks are due to Young Man Yoon and two anonymous reviewers for valuable comments. All remaining errors and shortcomings are mine.