A Comparative Analysis of Contractual Choice in Apartment Markets

By Taylor, Travis K. | International Advances in Economic Research, May 2007 | Go to article overview
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A Comparative Analysis of Contractual Choice in Apartment Markets


Taylor, Travis K., International Advances in Economic Research


JEL O50 * P00 * R10

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Apartment rental contracts vary considerably across the world. The ubiquitous monthly rent plus security deposit is the standard contract in the United States and many Western countries. In Asia, apartment landlords employ a variety of contracting methods that can be explained by economic and cultural factors. This paper juxtaposes apartment contracting methods in the US and South Korea. A model is developed to analyze contractual choice in Korea and ascertain the degree to which landlords and tenants respond to economic and institutional factors.

Rental property transactions involve complicated intertemporal maximization, asymmetric information, and a potential for opportunistic behavior if the contract is not safeguarded. Foremost is the fact that renters' and landlords' incentives are not properly aligned. To better align incentives, landlords often require tenants to pay in advance-typically by the month--and post a performance bond (the security deposit). Such contracts are common in the United States and across much of Europe. These contracts generally support exchange by safeguarding the lease agreement, while not unduly burdening the tenant with large payments up-front. In essence, this type of contract increases the tenant's liquidity and increases the range of apartment options.

Alternative contracting schemes exist in other countries. Japanese tenants are usually required to pay a non-refundable reikin (key money) worth several months rent to the landlord.

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A Comparative Analysis of Contractual Choice in Apartment Markets
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