Effects of Bad Debt Adjustment on Repayment: Evidence from the KR&C Data Set in South Korea

Namhyun Kim and Sanha Noh
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Namhyun Kim: Korea Deposit Insurance Corporation
Sanha Noh: Jeonbuk National University

Korean Economic Review, 2022, vol. 38, 509-539

Abstract: This study investigates the effects of debt adjustment for bad debts on repayment and discusses the optimal principal reduction rate. We use a logit model and propensity score matching, particularly employing a unique data set of creditors’ ledgers, debt adjustment information, and debtors’ characteristics from Korea Resolution & Collection, which manages bad debts in South Korea. We classify debtors into beneficiaries and nonbeneficiaries of the debt adjustment program and find that beneficiaries have larger repayment amounts than non-beneficiaries. An appropriate reduction rate is derived from a quadratic function consisting of expected repayment and reduction rates. This function is postulated to explore moral hazards that may arise from the expansion of the principal reduction rate. We find that if reduction rate is expanded from 60% to 70%, then it does not reach the maximum repayment rate but maintains the debt adjustment system’s effectiveness and the fund’s stability.

Keywords: Bad Debt Adjustment; KR&C; Moral Hazards; Principal Reduction Rate; PSM (search for similar items in EconPapers)
JEL-codes: D1 G2 G5 H0 (search for similar items in EconPapers)
Date: 2022
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