COLLUSION IN THE PRESENCE OF EXTERNALITIES*

I examine collusive bidder behavior in auctions with negative externalities and show that the optimal bidding scheme exhibits only partial rigidity. Because of externalities, a cartel not only has incentive to maximize gains from trade but also to minimize the probability of sales. I identify the tension between the two incentives and show that the more rigid the bidding scheme, the higher the possibility of sales. As the extent of externalities increases, the cartel finds it more important to keep a low probability of sales than to minimize payment to the seller. This results in a partially‐rigid optimal collusive bidding scheme.     

Crisis and Recovery: What We Have Learned from the South Korean Experience?*

This paper analyzes the process of recovery from the 1997 financial crisis in South Korea, and draws some lessons from it. The fast restoration of financial stability due to early closure of non‐viable financial institutions and quick resolution of non‐performing loans was critical for the speedy recovery of the South Korean economy. The swift adjustment in fiscal and monetary policies in addition to the large depreciation of real exchange rates also supported the fast recovery. Corporate and government bond markets played an important role in the financial restructuring and macroeconomic adjustment process. Structural reforms helped to alleviate the weaknesses in the corporate sector, particularly in chaebol groups. However, the fast recovery also generated unwelcome side‐effects. Because of aggressive fiscal expansion through government‐guaranteed bonds and public credit guarantee programs, sovereign liabilities increased greatly and transparency of the official fiscal stance deteriorated. Thanks to structural reform, corporate and financial sectors began to recognize the importance of micro risk management, but increased risk aversion contributed to the slowdown of corporate investment and, therefore, reduced long‐run growth perspective in South Korea. How to revive long‐term growth rates remains an important question in South Korea despite fast recovery from the crisis.     

Price Limit Performance: Evidence from the Tokyo Stock Exchange

Price limit advocates claim that price limits decrease stock price volatility, counter overreaction, and do not interfere with trading activity. Conversely, price limit critics claim that price limits cause higher volatility levels on subsequent days (volatility spillover hypothesis), prevent prices from efficiently reaching their equilibrium level (delayed price discovery hypothesis), and interfere with trading due to limitations imposed by price limits (trading interference hypothesis). Empirical research does not provide conclusive support for either positions. We examine the Tokyo Stock Exchange price limit system to test these hypotheses. Our evidence supports all three hypotheses suggesting that price limits may be ineffective.     

STRATEGY‐PROOF ALLOCATION OF INDIVISIBLE GOODS AMONG COUPLES

We consider the problem of allocating indivisible goods among couples. Agents in a couple share the indivisible good assigned to them. The main result is that an allocation rule is strategy‐proof, neutral and non‐bossy if and only if it is serially dictatorial. An allocation rule is serially dictatorial if there is a priority order of couples and a function that identifies who chooses in each couple, such that for all preference profiles, a good assigned to couple i is the best element according to the preference of the identified agent in couple i among the remaining goods when the couples with higher priorities have made their choice.     

THE DETERMINANTS OF KOREA'S FOREIGN DIRECT INVESTMENT FROM THE UNITED STATES, 1980–2001: AN EMPIRICAL INVESTIGATION OF FIRM-LEVEL DATA

This paper examines the link between Korea's foreign direct investment (FDI) inflows from the United States and locational, financial, and macroeconomic variables using firm-level data of FDI transactions, which were completed during the period from January 1980 to February 2001. Korea's FDI inflows from the United States are found to have significant associations with real exchange rates, relative wealth, relative wage costs, expected exchange rate changes, and interest rate differentials. The extent and direction of the links, however, have varied according to different FDI regimes during the last 20 yr in Korea. Industry-specific factors have also played a role in determining Korea's FDI inflows . ( JEL F21, F30)     

Lessons from the 1997 and the 2008 Crises in Korea

The Korean economy was hit harder than anticipated by the global financial crisis. In the first phase, large capital outflows led to a severe liquidity strain in the foreign exchange market, resulting in a rapid depreciation of the exchange rate. Then, in the second phase, the contraction of global demand led to a collapse of exports and a sharp decline in economic activity, raising concerns about a full‐fledged financial crisis in Korea. This paper describes how the global financial crisis spilled over into the Korean economy and how the Korean government responded to the financial turmoil. It also provides the background and rationale for the Korean government's decisions to adopt specific policy measures. Based on Korean experiences during the 1997 and the 2008 crises, this paper documents the lessons learned from the past two crises and identifies several important policy issues.     

Intra-Day Arbitrage Opportunities in Foreign Exchange and Eurocurrency Markets

We have two primary objectives in this study. First, we examine the frequency of attaining simultaneous equilibrium on spot and forward foreign exchange markets and on domestic and foreign securities markets. Second, we measure the profitability of covered interest arbitrage and one-way arbitrage. Our empirical analysis has been conducted using real-time quotations. The empirical results indicate that: (a) the markets are efficient in the sense that profit opportunities from traditional covered interest arbitrage are rarely available; and (b) the frequency of attaining simultaneous market equilibrium is surprisingly low, thus opening the door for one-way arbitrage.