Optimal chonsei to monthly rent conversion choice given borrowing constraints

Seryoong Ahn and Doojin Ryu

The Quarterly Review of Economics and Finance, 2024, vol. 93, issue C, 28-42

Abstract: Chonsei, an exceptional but prevalent housing rental system in the Republic of Korea, functions as private loans between individuals, and its implicit interest rate is called the “chonsei to monthly rent conversion rate”. Although the chonsei to monthly rent conversion rate is much higher than the interest rate of savings accounts or mortgage loans, making chonsei a more expensive channel of financing, chonsei remains a dominant type of rent in Korea. This study provides a novel theoretical model in a continuous-time portfolio selection framework that allows a lessor, given borrowing constraints, to optimally choose between chonsei and monthly rent contracts to show a possible solution to this situation. We investigate the optimal choice between chonsei and the monthly rent of lessors using a rigorous theoretical model and find a closed-form solution to the model. We analyze how credit availability in the banking sector affects the choice problem, showing that the lessor may prefer the chonsei contract over the monthly rent contract, given the borrowing limit from a bank. In addition, we analyze the impact of other major factors, such as the market price of risk, the amount of chonsei deposit, the monthly rental rate, and the income rate, on the lessor’s optimal decision between chonsei and monthly rent.

Keywords: Chonsei; Rent; Housing; Optimal stopping (search for similar items in EconPapers)
JEL-codes: G11 G21 G28 R31 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1062976923001357
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:93:y:2024:i:c:p:28-42

DOI: 10.1016/j.qref.2023.11.005

Access Statistics for this article

The Quarterly Review of Economics and Finance is currently edited by R. J. Arnould and J. E. Finnerty

More articles in The Quarterly Review of Economics and Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().