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

Sung Sik Park and Ju Hyun Pyun

Regional Science and Urban Economics, 2020, vol. 85, issue C

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.

Date: 2020
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:regeco:v:85:y:2020:i:c:s0166046220302635

DOI: 10.1016/j.regsciurbeco.2020.103578

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