Government vs. Private Control, Political Loans, and the Privatization of Korean Banks

29 Pages Posted: 7 Sep 2003

See all articles by Jaewook An

Jaewook An

Kyung-Hee University - Department of Economics

Sang-Kun Bae

Korea Economic Research Institute

Ronald A. Ratti

Western Sydney University - Department of Economics & Finance

Date Written: February 8, 2002

Abstract

This paper compares the performance of banks with and without effective government control in appointment of chief operating officers in Korea using panel data. A privatization program succeeded in spreading ownership of banks widely among the public. Government retention of an ownership stake in an institution meant de facto control by government, decision-making subject to political objectives, and lack of government respect for investors' property rights following privatization. A model is presented in which political loans are a constraint on banks subject to government control. It is found that banks controlled by government, despite charging lower loan rates, experienced disproportionately bad loan performance, and were inefficient compared to privately controlled banks.

JEL Classification: G21, G28

Suggested Citation

An, Jaewook and Bae, Sang-Kun and Ratti, Ronald A., Government vs. Private Control, Political Loans, and the Privatization of Korean Banks (February 8, 2002). Available at SSRN: https://ssrn.com/abstract=308364 or http://dx.doi.org/10.2139/ssrn.308364

Jaewook An (Contact Author)

Kyung-Hee University - Department of Economics ( email )

Hoigi-dong, Dongdaemoon-ku
Seoul 130-701
Korea
82-2-961-9339 (Phone)

Sang-Kun Bae

Korea Economic Research Institute ( email )

FKI bldg. 28-1
Yoido Yongdungpo
Seoul, 150-756
Korea, Republic of (South Korea)
+82-2-3771-0023 (Phone)
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HOME PAGE: http://blog.naver.com/econ_bae

Ronald A. Ratti

Western Sydney University - Department of Economics & Finance ( email )

Sydney, NSW 1797
Australia

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