Journal Archive

Home > Journal Archive
Cover Image
  • P-ISSN 2586-2995
  • E-ISSN 2586-4130
Online Appendix Cite

KDI Journal of Economic Policy. Vol. 41, No. 3, August 2019, pp. 1-38

× KDI Open Access is a program of fully open access journals to facilitate the widest possible dissemination of high-quality research. All research articles published in KDI JEP are immediately, permanently and freely available online for everyone to read, download and share in terms of the Creative Commons Attribution 4.0 International License.

Pyramidal Business Groups and Asymmetric Financial Frictions†


Author & Article History

Manuscript received 31 May 2019; revision received 12 June 2019; accepted 17 July 2019.


Given capital market imperfections, an entrepreneur can alleviate financial frictions by creating a pyramidal business group in which a parent firm offers its subsidiary firm internal finance. This endogenous creation of pyramidal business groups can beget asymmetric financial frictions between business-group firms and stand-alone firms. I build a model to show that these asymmetric financial frictions can have sizable effects on resource allocation. On one hand, the financial advantage of pyramidal business groups can foster productive firms by incorporating them as subsidiaries. On the other hand, the asymmetrically large amount of external capital controlled by pyramidal business groups can be expended by unproductive business-group firms and push up the equilibrium price of capital. The model suggests that with fine investor protection or low financial frictions, the benefits of pyramidal business groups can be dominated by their costs because the probability of fostering productive subsidiaries diminishes as the efficiency of external capital markets improves, while the prevalence of pyramidal business groups is not attenuated due to their continuing asymmetric financial advantage.


Business Group, Capital Market, Financial friction, Pyramidal Ownership Structure, Resource Allocation

JEL Code

E23, E44, G32, O16

상단으로 이동