Financial repression and housing investment: An analysis of the Korean chonsei

South Korea has a unique kind of rental contract, called chonsei. The tenant pays an upfront deposit, typically from 40% to 70% of the property value, to the landlord, and the landlord repays the deposit to the tenant upon contract termination. The tenant is not required to make any periodic monthly rental payments. The main goal of this paper is to show why such a unique rental contract exists and has been popular in Korea. The model shows that chonsei is an ingenious market response in the era of “financial repression” in Korea (Renaud, 1989), allowing landlords to accumulate sufficient funds for housing investment without major reliance on a mortgage. The model also shows that the tenant, who suffers from insufficient mortgage borrowings, can access cheaper rental housing via chonsei than when only monthly rental housing is available. The model predicts that the chonsei system should fade out when arbitrage gains from housing investment disappear. An implication of the model is that the chonsei renter may save while the landlord and the owner-occupier put all their assets into housing and thus have no financial savings. This hypothesis is empirically tested and confirmed.     

The impact of the disposition effect on asset prices: insight from the NBA

In this paper we examine the price movements of contracts that represent bets on NBA games and find that the disposition effect causes significant deviations between contract prices and values. The contracts under examination are listed on Tradesports, a prediction market which provides an ideal venue for testing this and other behavioral theories because of its asset properties, market structure, and the absence of the joint hypothesis problem. In our analysis, we forecast the projected final combined scores of both teams in a contest based on observed within-game scores and game time remaining. At all points in time throughout each game, mean future returns (measured as Ticks to Expiry) should be no different than zero. However, we find that contracts which have fallen off pace to exceed the stated contract total become overpriced and experience negative future returns. Likewise, we provide evidence that contracts on games in which teams are on pace to exceed the stated total become underpriced and experience significantly positive future returns. These findings are consistent with the disposition effect in which traders tend to hold losing positions to avoid realizing losses yet prematurely unwind winning positions to realize gains.     

Discrimination in rental markets: Evidence from Norway

This paper examines discrimination in the rental housing market. We analyze a rich data set on rental contracts from Norway. We find that tenants born abroad pay a statistically significant and economically important premium for their dwelling units after controlling for a comprehensive set of apartment, individual and contract specific covariates. Moreover, we find that the premium is largest for tenants of African origin. Finally, Norwegians whose parents were born abroad also face a statistically significant and economically important rental premium that is directly comparable to the premium paid by tenants born abroad.     

What effect does uncertainty have on the length of labor contracts?

The literature on duration of explicit labor contracts has suggested that increased uncertainty should be associated with shorter labor contracts. More recently, it has been argued that the effect of uncertainty on contract duration depends on the type of uncertainty involved. Specifically, if the uncertainty pertains to aggregate real shocks, then contract durations should increase as workers seek to insure themselves against the repercussions of such shocks. Using a sample of 1876 labor contracts signed during the period 1977–1988, this paper provides an empirical test of the foregoing hypothesis (known as the efficient risk sharing hypothesis). The paper presents results from estimation of a generalized-probit, simultaneous equation model, in which the dependent variables are contract length, indexation of the contract through a cost-of-living allowance, and the rate of wage change specified in the contract. The empirical findings confirm the efficient risk sharing hypothesis.     

Brokers’ contractual arrangements in the Manhattan residential rental market

We bring new evidence to bear on the role of intermediaries in frictional matching markets and on how parties design contracts with them. Specifically, we examine two features of contracts between landlords and agents in the Manhattan residential rental market. In our data, 72 percent of listings involve exclusive relationships between landlords and agents (the remaining 28 percent are non-exclusive); and in 21 percent of listings, the landlord commits to pay the agent’s fee (in the other 79 percent, the tenant pays the agent’s the fee). Our analysis highlights that these contractual features reflect landlords’ concerns about providing agents with incentives to exert effort specific to their rental units and to screen among heterogeneous tenants.     

Financial contracts as coordination device

We study the use of financial contracts as bid‐coordinating device in multi‐unit uniform price auctions. Coordination is required whenever firms face a volunteer's dilemma in pricing strategies: one firm (the “volunteer") is needed to increase the market clearing price. Volunteering, however, is costly, as inframarginal suppliers sell their entire capacity whereas the volunteer only sells residual demand. We identify conditions under which signing financial contracts solves this dilemma. We test our framework exploiting data on contract positions by large producers in the New York power market. Using a Monte Carlo simulation, we show that the contracting strategy is payoff dominant and provide estimates of the benefits of such strategy.     

Spillover effects of subprime mortgage originations: The effects of single-family mortgage credit expansion on the multifamily rental market

The dramatic expansion in subprime mortgage credit fueled a remarkable boom and bust in the US housing market and created a global financial crisis. Even though considerable research examines the housing and mortgage markets during the previous decade, how the expansion in mortgage credit affected the rental market remains unclear; and yet, over 30 percent of all U.S. households reside in the rental market. Our study fills this gap by showing how the multifamily rental market was adversely affected by the development of subprime lending in the single-family market before the advent of the 2007/2008 subprime induced financial crisis. We provide evidence for a fundamentals based linkage by which the effect of an innovation in one market (i.e, the growth in subprime mortgage originations) is propagated through to another market. Using a large database of residential rental lease payment records, our results confirm that the expansion in subprime lending corresponds with an overall decline in the quality of rental payments. Finally, we present evidence showing that the financial performance of multifamily rental properties reflected the increase in rental lease defaults.     

International Franchising Practices in Mexico: Do Franchisors Customize Their Contracts?

The contracting practices of franchisors outside their domestic market have received little attention in the empirical literature on franchising to date, largely because of lack of data. We exploit a novel data set that allows us to describe the contracts offered by a number of US and Canadian franchisors operating in Mexico and also compare them to contracts employed at home. Our analyses reveal a series of stylized facts that we hope will prove useful in guiding future empirical and theoretical research on contracting and especially on cross-border contracting practices. These are as follows: (1) The overwhelming majority of franchisors seeking franchisees in Mexico offer exactly the same contract to potential Mexican franchisees as that employed in the home market; (2) Among those franchisors that already have established outlets in Mexico, nearly half use the exact same fees in Mexico and at home; (3) The majority of those franchisors that make changes only alter the fixed fee component of the contract; (4) There is no evidence that franchisors use franchising more or less in Mexico compared to home as an alternative to royalty rate customization—in fact, the extent of franchising (versus company-owned units) of these firms in Mexico is not different systematically from that observed in their domestic market or worldwide; and (5) There is no evidence of increased customization over time—if anything, the evidence suggests increased similarities in contracting practices over time.     

Managerial incentives for process innovation

Cost‐reducing investments by firms are often not publicly observable. This lack of observability would preclude a strategic use of process innovation. However, we show that an observable and verifiable contract that provides direct monetary incentives for cost reductions — an innovation incentive contract — can act as a strategic commitment device. Our model predicts that manager‐led firms are more innovative than owner‐led firms and that these contracts become less prevalent as product market competition intensifies. Both predictions are consistent with recent empirical evidence. Copyright © 2008 John Wiley & Sons, Ltd.     

Contract equilibria in a regulated rental housing market

Various contractual equilibrium concepts for a regulated rental housing market are studied in this paper. Regulation refers to rental contracts with institutionally prescribed structures and rental prices, a situation common for housing markets with restrictive rental protection legislation. Contracts can then be considered as indivisible commodities with certain unusual characteristics. Existence of equilibria of the various types is shown under rather weak assumptions.     

Contract ineffectiveness in emerging markets: An institutional theory perspective

The effectiveness of contracts is bounded by the institutional environment in which they are designed and enforced. When firms form supply chain partnerships in emerging markets, they may experience contract ineffectiveness, which is defined as a firm's perceived limits of contracts with respect to safeguarding interests and coordinating activities. Specifically, we identify two institutional factors that may give rise to contract ineffectiveness, information transparency and legal enforceability, as they determine how effectively a firm designs and enforces a contract. In addition, we reveal that contract ineffectiveness prompts a firm to seek social ties, including business ties and political ties, to overcome the institutionally induced limits of contracts. These efforts, however, are moderated by the type of predominant pressure a firm bears. While equity pressure strengthens the relationship between contract ineffectiveness and a firm's pursuit of social ties, efficiency pressure weakens this relationship, because seeking social ties imposes an extra burden of efficiency. Tested by data collected from 187 distributors in China, our study reveals the institutional causes and the consequences of contract ineffectiveness, which is a common problem encountered by firms when forming supply chain partnerships in emerging markets.     

Are There Tax Arbitrage Opportunities in Private Rental Housing Markets?

Tax arbitrage opportunities in rental housing markets arise when high bracket taxpayers exploit the tax shelter and conversion features of the tax treatment of rental housing and as a consequence offer low bracket taxpayers rental housing at a cost lower than if they purchased the same quantity of housing for owner occupation. A microdata set has been employed to estimate the size of these tax arbitrage opportunities with respect to 1907 properties owned by Australian landlords. The measure of tax arbitrage opportunities is the breakeven tax rate at which the maximum rental rate a potential occupant is prepared to pay before turning to purchased housing is equal to the landlord's reservation rental rate. Potential occupants with marginal tax rates below the breakeven tax rate find that renting has a relative cost advantage over home purchase. When agency costs (the costs incurred in managing landlord-tenant relationships) are included in the tax arbitrage model, our estimates of the breakeven tax rate indicate that home purchase has a relative cost advantage over renting for most potential occupants. Renting is only financially attractive to low tax bracket individuals. This finding is consistent with Australian tenure patterns. However, there are more puzzling results. A majority of landlords belong to tax brackets below the top bracket, landlords in the lowest tax brackets typically make below normal profits, and reservation rental rates at the bottom of the rental housing market are relatively high. Down payment requirements, lock-in effects, and rent clientele groups are put forward as possible explanations for these findings.     

Long-Term or Short-Term Managerial Incentive Contracts

This paper deals with the strategic role of the temporal dimension of contracts in a duopoly market. Is it better for a firm to sign long-term incentive contracts with managers or short-term contracts? For the linear case, with strategic substitutes (complements) in the product market, the incentive variables are also strategic substitutes (complements). It is shown that a long-term contract makes a firm a leader in incentives, while a short-term contract makes it a follower. We find that, under Bertrand competition, in equilibrium one firm signs a long-term contract and the other firm short-term incentive contracts; however, under Cournot competition, the dominant strategy is to sign long-term incentive contracts.     

Keeping a weather eye on prediction markets: The influence of environmental conditions on forecasting accuracy

Increasingly, prediction markets are being embraced as a mechanism for eliciting and aggregating dispersed information and providing a means of deriving probabilistic forecasts of future uncertain events. The efficient market hypothesis postulates that prediction market prices should incorporate all information that is relevant to the performances of the contracts traded. This paper shows that such may not be the case in relation to information regarding environmental factors such as the weather and atmospheric conditions. In the context of horserace betting markets, we demonstrate that even after the effects of these factors on the contestants (horses and jockeys) have been discounted, the accuracy of the probabilities derived from market prices is affected systematically by the prevailing weather and atmospheric conditions. We show that significantly better forecasts can be derived from prediction markets if we correct for this phenomenon, and that these improvements have substantial economic value.     

Quasi-experimental evidence on the effect of aircraft noise on apartment rents

Inferring the implicit price of an environmental good hinges on ceteris paribus conditions that are often hard to justify. This paper uses an unexpected change in flight regulations as source of exogenous variation and identifies aircraft noise effects from price adjustments in the market for rental apartments. Controlling for spatial and apartment heterogeneity, we find that aircraft noise reduces apartment rents by about 0.5% per decibel. Our results indicate (i) that noise discounts are overestimated in cross-sectional studies because aircraft noise tends to be negatively correlated with omitted neighborhood and housing amenities and (ii) that noise effects are unlikely to be constant over the entire noise range.     

瑞士住宅市场特征解读及启示

与其他国家相比,瑞士住宅市场有四大特征:一是瑞士居民主体以租房为主,房地产的自有化率比较低;二是瑞士的房价高,但住宅市场保持平稳,并未出现周期性的高潮阶段和低谷阶段;三是瑞士住宅市场的空置率很低;四是公共租赁房占据租赁市场的最大份额。这些特征可以为我国的房地产政策的长效机制提供借鉴。     

An empirical analysis of the Carbon Financial Instrument

This study provides an empirical investigation of the price volatility—trading volume relationship for the Carbon Financial Instrument (CFI). A CFI is a financial contract that is traded on the Chicago Climate Exchange (CCX) and represents the right to emit 100 metric tons of CO₂ equivalent. CFI contracts differ from one another on the basis of their allocation year to CCX member firms, referred to as their respective Vintage year. We provide evidence indicating a positive contemporaneous relationship between price changes and trading volume for the different CFI Vintage contracts. Employing bivariate VAR models that adjust for trade duration, we find that CFI price volatility and trading volume are persistent across time. Furthermore, we provide evidence indicating that lagged volume increases price volatility, in addition to lagged price volatility increasing trading volume levels in the CCX market. Our results are in agreement with prior research documenting significant positive price volatility—volume relationships in traditional equity markets.     

An analysis of UK franchise contracting 1989–1999

This paper examines UK franchise contracts over the period 1989–1999. Franchising is modelled as comprising three main variables, contract length, royalty rate and initial franchise fee. Up to now most authors have concentrated on the latter two variables, but with the data in this paper it is possible to assess the characteristics that impact on all three. Further, our analysis looks at what affects the probability of contract change. We take account of the limited dependent variable nature of the data and exploit sectoral heterogeneity. Our main findings are that the focus of attention on ‘aggregate’ variables is inappropriate and that contract length appears to be an important aspect of the franchise contract which is theoretically obvious, but until now has not been empirically tested. Copyright © 2003 John Wiley & Sons, Ltd.     

On moral hazard and nonexclusive contracts

We study an economy where intermediaries compete over contracts in a nonexclusive insurance market affected by moral hazard. In this context, we show that, contrarily to what is commonly believed, market equilibria may fail to be efficient even if the planner is not allowed to enforce exclusivity of trades (third best inefficiency). Our setting is the same as that of Bisin and Guaitoli [Bisin, A., Guaitoli, D., 2004. Moral hazard with nonexclusive contracts. Rand Journal of Economics 2, 306–328]. We hence argue that some of the equilibrium conditions they imposed are not necessary, and we exhibit a set of equilibrium allocations which fail to satisfy them.