An Equilibrium Model of the Chonsei System

Chonsei deposits are a unique form of real estate credit popular in the Korean housing market, in which tenants make interest-free loans to landlords in exchange for paying reduced rent. This paper constructs an equilibrium model of the Chonsei market. Chonsei deposit size is pinned down by requiring tenants to be indifferent between renting, and borrowing from banks at positive interest rates to fund Chonsei deposits. Thus, the Chonsei-rent ratio should be approximately equal to the interest rates at which Chonsei tenants borrow from banks. We verify the model’s predictions in the data. Our model implies that, when interest rates decrease towards zero, Chonsei deposits can grow unboundedly large. A simple policy – imposing a proportional tax on Chonsei deposits – can substantially reduce the size of Chonsei deposits, and also dampen the effect of interest rate changes on the size of Chonsei deposits