Between two extreme practices of rent-only and deposit-only leases in Korea: default risk vs. cost of capital

49 Pages Posted: 27 Feb 2019 Last revised: 4 Aug 2020

See all articles by Sung Sik Park

Sung Sik Park

Chestertons

Ju Hyun Pyun

Korea University Business School (KUBS)

Date Written: February 11, 2019

Abstract

Security deposits in Korea simultaneously serve as zero coupon bonds that maximize the landlord’s return, put options for selling the property, and call options for buying credit loss reimbursement. Given these properties of the deposits, we construct a rent-deposit equilibrium model between landlords and tenants with a stochastic process of the use value of the property. The model predicts that the equilibrium deposit-to-rent ratio increases with the landlord’s return on property investment and decreases with the tenant’s cost of capital. In particular, the theory with the cost of capital explains why both deposit-only and rent-only leases co-exist in Korea. Empirical results from Korean household data support the model’s predictions.

Keywords: Chonsei; Antichresis; Property Leases; Korean Housing Market; Rent–Deposit Equilibrium Model

JEL Classification: D10; K2; R21; R31

Suggested Citation

Park, Sung Sik and Pyun, Ju Hyun, Between two extreme practices of rent-only and deposit-only leases in Korea: default risk vs. cost of capital (February 11, 2019). Available at SSRN: https://ssrn.com/abstract=3332307 or http://dx.doi.org/10.2139/ssrn.3332307

Sung Sik Park

Chestertons

Ju Hyun Pyun (Contact Author)

Korea University Business School (KUBS) ( email )

145 Anam-Ro, Seongbuk-Gu
Seoul, 02841
Korea, Republic of (South Korea)
82-2-3290-2610 (Phone)

HOME PAGE: http://sites.google.com/site/juhyunpyun/research

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