Bankruptcy Policy Reform and Total Factor Productivity Dynamics in Korea
Bankruptcy Policy Reform and Total Factor Productivity Dynamics in Korea
Evidence from Microdata
During the onset of the Korean financial crisis in 1997, an inefficient corporate bankruptcy system adversely affected Korea's economy. The inadequacies of the bankruptcy system led to poor discipline in targeting the appropriate financially distressed firms to undergo rehabilitation. Meanwhile, before the outbreak of the economic crisis, the uncertainty and delay encountered in dealing with failing firms clearly added to the distortion of the resource allocation process in Korea's economy. Hence, the natural course of action for post-crisis Korea was to undertake a sweeping reform of its corporate bankruptcy system. This chapter investigates the effects of bankruptcy policy reform in Korea by analyzing data at the firm or plant level, focusing on bankruptcy procedures administered by the courts. It examines whether manufacturing firms accepted under the reformed court-administered rehabilitation procedures experienced less persistent problems in their pre-bankruptcy total factor productivity (TFP) compared to firms undergoing the same process before the reforms. It also discusses how the reforms improved the efficiency of resource reallocation and, in turn, aggregate TFP growth.
Keywords: bankruptcy, Korea, total factor productivity, resource reallocation, policy reform, rehabilitation, manufacturing firms, courts
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