KDI - Korea Development Institute - RESEARCH - Research Areas

Summary

Research Monograph KOR Korean Unique Regulations in Housing Market

We study regulations in the housing market, which are very unique and have great influences in Korea. Due to COVID-19, the housing market have experienced rapid changes. Thus, the government responded boldly with unprecedented policies. Among others, 3 special regulations are on the table for discussion. The first is the Land Transaction Permit, which was implemented to reduce demand on housing in specific regions. Second, the Price Cap on New Houses is investigated for housing supply policy. The final is a regulation on the contract renewal claims in the housing rental market.

Chapter 2 analyzes the direct and indirect price effects of the Land Transaction Permit (LTP), a selective regulation introduced in 2020 for high-priced houses in Seoul to stabilize skyrocketing prices. The LTP is an administrative regulation that requires local governments to permit transactions in designated "areas," and as of 2022, the total area covered by the LTP is about 9% of Seoul's land area.Houses in the LTP zone can only be purchased by buyers who are either homeless or will eventually become single-family homeowners, and they must actually live in the houses for two years immediately after purchase. In this study, we analyzed the price and transaction volume of LTP regulated and unregulated houses, focusing on "Jamsil-dong, Samsung-dong, Daechi-dong, and Cheongdam-dong," which were designated in June 2020. In the regulated area, the LTP scheme directly reduced transaction volumes by 38.3% and prices by 4.3% compared to unregulated areas. However, the LTP scheme unexpectedly had a positive price appreciation effect on homes located closer to the regulated areas. When unregulated dwellings are categorized according to their distance from the regulated area, we estimate that dwellings closer to the regulated area increased in price by 2.3% relative to dwellings further away, and this effect is larger the closer they are to the regulated area. It appears that some of the demand in the regulated area shifts to nearby unregulated areas with higher substitutability. The different direction of the direct effect on regulated areas and the indirect effect on nearby areas suggests that selective regulation, such as LTP, may not be the right regulatory approach to achieve the goal of stabilizing the housing market.

The next chapter, Chapter 3, examines the effects of the Price Cap on New Houses. This price cap, which limits the price of new homes, is one of the controversial regulations that raises concerns that it may limit housing supply in the future. However, this study's analysis found no evidence that the price cap reduces the supply of new homes. Although the pre-sale price cap limits the profits of housing construction projects, it is operated by reflecting all the costs of land and construction for housing supply. Even if the prices of newly supplied homes are limited by the price cap during the period when the housing price is on the rise, the sales of new homes is likely to increase as well. Thereby housing development projects are profitable enough to cover all the costs. Therefore, there appears to be no empirical evidence for concerns that future housing supply will be reduced by this price cap implemented during the housing market boom. However, these results are contradictory to the results of existing studies, so caution needs to be taken when interpreting them further.

Chapter 4 investigates the price impact of the deposit control imposed on the housing repo contract in Korea, known as Jeonse. Jeonse is a unique housing repo contract in Korea where the landlord borrows a deposit from the tenant, using the house as collateral. The tenant is granted the right to occupy the house during the contract period at the expense of the deposit’s opportunity cost. In July 2020, the Korean legislature passed a law granting tenants the right to renew the Jeonse contract once, with the new deposit amount not exceeding a 5% increase from the original amount. While this new regulation has been heavily criticized as the primary driver of the surge in Jeonse deposits during the pandemic, its actual price impact has not been properly estimated.

We estimate the value of the Jeonse renewal option monthly using option pricing techniques, based on reasonable assumptions about the housing price process and information gathered from the current term structure of interest rates. Our estimation results indicate that the deposit control regulation raised Jeonse deposits nationwide by only 0.97% and by 4.80% in Seoul at the time of the introduction of the regulation, a magnitude significantly lower than previously discussed in both media and academic circles. Furthermore, we demonstrate that the renewal option does not have any intrinsic value over the past 10 years, suggesting that the option can be considered pure insurance against an unexpected increase in the equilibrium level of Jeonse deposits by the time of expiry. Based on the background of the regulation and the results of our analysis, we provide policy suggestions.

Summary

KDI FOCUS Restructuring Platform Merger Review

Platform mergers differ significantly from traditional mergers. In platform mergers, foreclosure issues, which are crucial in traditional vertical mergers, carry less significance but may still arise indirectly. Platforms, moreover, can favor their own businesses potentially disadvantaging competitors, and leverage their market power to new businesses. Lastly, entry barriers could increase as a result of platforms’ multi-service provisions. Nevertheless, platforms can enhance consumer welfare, especially through product (service) bundling. Thus, we need to overhaul the merger review system to incorporate the aforementioned characteristics of platform mergers.

- Amidst the escalating debate on platform regulation, there has been a surge in platform mergers, leading to a corresponding increase in the need for platform merger reviews.

- There is a need for new guidelines for platform merger review to reflect the unique characteristics of such mergers. These guidelines should outline the review methodology and the assessment of potential competitive constraints.

- Indirect network externality plays a crucial role in locking in users to specific platforms.

- Platform firms provide a diverse range of services, offering multiple ancillary service platforms that revolve around a few core platforms or other businesses associated with the platforms.

- Platform firms often pursue mergers to expand into new revenue-creating areas or to strengthen their competitiveness in core services.

- One significant concern regarding anticompetitive practices in platform mergers is the potential for excluding competitors via selfpreferencing in the new markets.

- The addition of new ancillary services through a merger can potentially raise entry barriers in both the platform’s core service areas and the overall platform ecosystem.

- If a vertical merger leads to the foreclosure of purchasing or sales channels, it can seriously harm market competition.

- In mixed mergers, leveraging market power from one market to another can occur through tying.

- The determination of whether a merger is vertical or mixed is bound to be confusing when a platform, acting as an intermediary between consumers and small and medium-sized vendors, seeks to merge in order to add an auxiliary service for these vendors.

- Platform operators have the ability to foreclose competitors in other sectors but only indirectly, using accessibility to users.

- Without tying, platform operators can leverage market power from their core business area to ancillary service areas by raising rival’s costs.

- Platform mergers can raise barriers to entry not only in new markets but also in existing core service areas and the overall platform ecosystem. In some cases, the creation and reinforcement of entry barriers may be a deliberate objective of the merging parties.

Summary

Research Monograph KOR Digital Payment Innovation and Financial Consumer Protection

○ Even with weak legislative support, the digital economy is gaining momentum, propelled by the recent progress in contactless financial services and digital finance’s growing convergence with other sectors.
- As the primary legal framework for digital finance, the Electronic Financial Transactions Act (EFTA) had an amendment proposal in November 2020, but the bill is still pending at the National Assembly.
- Despite its vital importance in the Korean economy as a legal foundation for financial innovation, the EFTA has remained largely intact since its enactment in 2006 and has not been sufficient institutional support for critical technological changes like the rise of fintech and big tech.

○ Key point of the amendment is opening up payment services to non-banking financial institutions, such as tech firms (big tech) and credit card firms.
- Payment services are an essential amenity in our everyday life, encompassing payment for goods and services, cash deposit and withdrawal, salary transfer, domestic and foreign remittance, and utility bill payment.
- The amendment bill introduces a license of Comprehensive Payment Service Provider (CPSP), which is allowed to provide all payment services by directly offering a checking account like banks.
- Once the bill passes, some big tech firms as well as conventional nonbank financial institutions like credit card issuers are expected to get the license of CPSP.

○ The significance of payment services lies in that this sector is the basis for nonbank entities to expand into other areas, such as banking, insurance, and financial investment in the mid-to-long term.
- Because every economic activity involves the act of paying, CPSPs can accumulate vast user data.
- Also, these operators can bring in a massive amount of funds that customers deposit for payment transfers. Such funds can be used to launch new customized investment products or expand their business to other financial markets.

○ In the longer term, opening up digital payment services may thrust the financial industry to the next level by stimulating competition from within.
- A single app or metaverse platform is all it takes for users to carry out the whole array of financial services and e-commerce, not to mention payment transfers. Also foreseeable are crumbling barriers between different subsectors within the broad financial sector and spurring competition across the entire industry.

○ Some are rather pessimistic about the open-up because they perceive it as flinging open the door of banking; however, this study does not regard it as harming financial stability.
- The required regulatory level should be on par with banking regulations when deeming CPSPs as banks, but as nonbank payment service providers the degree of restrictiveness and protection would decrease.
- This study views the core function of banks as financial intermediation, which transfers customer deposits into illiquid loans. Since payment service operators cannot provide loans, it is reasonable to regard them as nonbank payment institutions (refer to Chapter 4).

○ On the other hand, financial consumer protection remains crucial agenda.
- Since most payment service users place their funds in demand deposit accounts, protecting these funds and guaranteeing service users’ rights are critical.
- The amendment bill contains some protective measures, but in the UK, where a similar scheme has been in operation, several payment service providers went bankrupt without returning customer funds.

Summary

KDI Policy Forum The SME-Suitable Industry Reservation Policy: Economic Effects and Policy Direction

■ After marking the ten-year milestone since the adoption of the SME-suitable industry reservation policy, this study investigates whether the policy has enhanced the competitiveness of SMEs by safeguarding them as intended and offers implications for its future implementation.

- This SME policy involves the selection of specific products to protect the business territories of SMEs and limit the entry or expansion of large enterprises; however, evidence-based discussions on its effectiveness have been limited.

- While the production and employment of large businesses decreased after the adoption, the business activities of SMEs did not change much.

■ This reservation policy aimed to "ensure the competitiveness of SMEs through their protection." It successfully fulfilled its protective role by reducing the likelihood of SMEs exiting the market. However, the reservation policy had limited impact in terms of improving their performance or competitiveness.

- Following the designation of a set of industries (products) reserved for SMEs, the probability of exit for SMEs engaged in the production of those specific products significantly decreased. However, these SMEs did not show significant differences compared to other product producers in terms of most performance and input indicators.

- The industry-level analysis shows that the policy contributed little to the performance of overall industries to which the designated products belong.

■ The disappointing outcomes of the policy’s stringent measures highlight its limited effectiveness, as the restrictions on the expansion or entry of large enterprises did not lead to significant improvements in the performance of SMEs.

■ Based on the findings, it is recommended to suspend new applications for the designation of SME-suitable industries and gradually phase out the already designated reserved industries.

- In any business field, when there is greater uncertainty about future market restrictions, firms are less incentivized to engage in that market and invest in domestic production facilities.

- A policy that restricts production activity in a specific business area solely based on firm size may inadvertently undermine the efficiency of resource allocation in the broader economy.

■ Instead of protecting specific business areas, a win-win policy between SMEs and large firms should prioritize providing effective support for the growth of capable SMEs through appropriate regulatory measures to address anti-competitive and unfair practices.

Summary

Research Monograph KOR Designing the Criteria on the SME Support Policy: Focusing on the Definition of SME and Small-Scale Reservation Policy

Government support programs for small and medium enterprises (SMEs) and regulations for large firms are all size-dependent policies. The purpose of this study is to evaluate the effectiveness of the SME definition and the small-scale reservation policy on SMEs' performance. This study intends to provide policy implications when designing the criteria for the SME support policy.

Chapter 1 introduces the criteria for defining SMEs and presents the distribution of firms according to the SME size categories. In Korea, SMEs account for over 99% of the total number of business enterprises, meaning that the definition of SMEs is broad enough to include most firms. There are numerous policy programs and tax benefits for SMEs in Korea and this chapter lists those support policies according to various size categories.

Considering all SME policies are size-dependent, Chapter 2 examines the effect of size-dependent policies overall, not of individual and specific policy, by analyzing changes in firm performances and employment with a change in the criteria used to categorize SMEs. We exploit the changes in the SME status of each individual firm by the change in the criteria to measure the effects. The result shows that the criteria change from the employment size categories into the turnover size categories has little impact on achieving the intended growth in employment. However, newly designated SMEs show significantly increased sales. This finding can be interpreted as indirect evidence of positive effects from tax benefits and support programs targeting SMEs, but further research is needed to find direct evidence. We also found that there is a significant decrease in sales per employee for the firms whose SME status is withdrawn, suggesting that there exists an incentive to maintain the status.

Chapter 3 demonstrates the economic effects of reservation policy for SMEs. Among an array of size-dependent policies, the reservation policy is one of the most restrictive policies since it directly regulates the entry and production activities of large enterprises for specific goods. The analysis demonstrates that although reserving certain markets may temporarily safeguard the SMEs producing the products, this effect is temporal and not beneficial to the industry's overall growth. The reservation policy may be of little use in securing the competitiveness of SMEs and can potentially exacerbate the misallocation of the resources among the enterprises within the economy. This study also points out that even in the markets not reserved for SMEs, investment incentives may shrink on the uncertainty that their production activities could be restricted at any time.

The findings of this study are consistent with recent studies arguing that the diverse distribution of firm characteristics such as productivity and size should be considered when designing SME policies. The overall productivity of an economy can increase when resource allocation shifts from low-productive firms to high-productive ones. In turn, it shows the need to check whether a policy operates against efficient resource allocation when examining the impact of a specific policy on the economy as a whole. Furthermore, this study is relevant to the field of measuring the effectiveness of SME policy by providing empirical analysis at enterprise or establishment levels.

Summary

Policy Study KOR Competitive Bottleneck Platform’s Strategies and Policy Intervention

This research studies a competitive bottleneck market. Reviewing the exiting literature, I try to enhance our understanding of the competitive bottleneck market, and discuss policy intervention tools based on the understanding. I also construct a theoretical model on the business coordination strategy between a platform and seller-side users, to investigate the effect on market competition, market structure, innovation activities, and user welfare. The business coordination, such as exclusive contracts and mergers, can resolve the competitive bottleneck situation, relieve the buyer-side competition, and harm single-homing buyer’s welfare. In the case of merger in which the platform acquires some of the multi-homing sellers, some of sellers can be single-homing. Or seller-side can disappear as the platform internalizes all seller-side users. Then, the (competitive bottleneck) market becomes two-sided single-homing market or the one-sided market. This study shows that the platform has an incentive to adopt the business coordination strategy, to remove the competitive bottleneck and increase the profits.

The policy suggestion in this work can be divided into three groups. The first is industrial policy, the second is regulation policy, and the last is consumer protection. For the industrial policy, I discuss the government assistance to secure users and the innovation support for the sellers, in the view of the long-term productivity improvement. For the regulation / consumer protection, I concentrate on the consumer welfare (or user welfare). When the seller-side users are consist of mid and small size businesses or self-employed businesses, the welfare of seller-side users becomes a policy maker’s concern, as well as the consumer welfare.

To discipline the abuse of market dominance by the competitive bottleneck platform, the large scale modification for the existing regulation tools is needed. In the competitive bottleneck market, the anti-competitive conducts can happen in the competitive side of the market, rather than in monopoly side of the market. Thus, we need new perspectives to regulate the anti-competitive conducts. For the cartel cases, we also need the significant modification in the regulation schemes. The restrained competition on one side can promote the competition on the other side. For the merger investigation, we need to study how the market structure, competition patterns, and user welfare change, as well as the possibility of foreclosing effects and exploitative conducts, which are examined currently.

Summary

Policy Study KOR Do Online Platforms Reduce Information Asymmetry?

This study examines the information asymmetry of the platform economy in the context of the sharing economy. In particular, the focus was placed on Airbnb's superhost policy, and the effects of the platform's reputation badge (quality certification) on transaction volume and moral hazards were analyzed and the effectiveness of various trust-building market-mechanisms was compared. By combining the database of Inside Airbnb and AirDNA, an analysis was conducted of the data on New York City from August 2016 to December 2018 (from Airbnb webpage). Superhost badges have been shown to have a positive impact on performance―providing incentives for hosts to maintain and improve service quality. However, incentive for reputation milking was also found. Indeed, when selected as a superhost, the number of listings increased while service quality and guest satisfaction gradually decreased. This shows the imperfections and limitations of market mechanisms. However, since the moral hazard is not severe, it can be inferred that self-regulation is still effective under a proper design. Besides, the effects of signaling devices were found to differ depending on whether the guest or the host bears the burden of authentication. The results suggest that it is necessary to discuss the optimal design for a trust building mechanism before discussing government intervention in the matter of information asymmetry.

Summary

Research Monograph KOR An Economic Analysis of Consumer Behavioral Biases and Its Policy Implications: Focusing on Drip Pricing

Among the practices pertaining to the exploitation of consumers’ behavioral bias in product pricing and information disclosure, this study analyzes drip pricing; considered to be the most damaging to consumers. The negative effects have been confirmed in several preceding literature and analyses which show that drip pricing can impel consumers to not only to search and compare less but also to respond numbly to additional charges, subsequently inducing an increased demand for the product. Empirical analysis of Airbnb data reaffirms the existence of consumers’ behavioral bias and also indicates that suppliers may have stronger incentive to take advantage of such bias as they attain more knowledge of it. Specifically, analysis of the drip-pricing practices of Airbnbs, in which obligatory extra fees for cleaning and additional guests are presented after the accommodation fees, revealed that the occupancy rate responds more numbly to the extra fees than to the accommodation fee and that hosts with more experience and know-how have a tendency to apply separate and higher cleaning fees. Moreover, an international comparison of the regulations for and enforcement of price disclosure showed that although all countries have explicit bans on drip pricing in the aviation industry, there are no specific rules for other industries, except for Australia, and instead, regulatory provisions are enforced on certain actions, which could mislead consumers. To that end, like major countries, Korea should make further efforts to establish and enforce regulations to clarify when and how the service provider discloses the total price where all obligatory fees are included.

Summary

Policy Study KOR Preventing Unfair Subcontracting Behaviours

The disparity in bargaining power between contracting parties can engender unfair subcontracting behaviours. This calls for policy measures to resolve such issues within subcontracting practices, especially in setting subcontract prices for which fairness is difficult to determine. At the same time, the government should consider the negative effects of the policies on social welfare as an increase in subcontract prices may raise the price of final goods. Accordingly, this study examines policy measures that reduce the bargaining power gap without diminishing welfare.

Since exclusive contracts are impeded by hold-up possibilities, it is reasonable to suppress the bargaining power of purchasers engaging in exclusive contracts. Suppliers will then find it profitable to switch to exclusive contracts. The more contracts become exclusive, the less costs are incurred by the contracting parties in production and transaction, which enhances efficiency. One way to curb the widening of the bargaining power gap under exclusive contracts is forcing purchasers to prove why a price cut is necessary. Stronger penalties may also be effective. But, before measures can be implemented, a clear definition of “exclusive contract” is required. A useful criterion would be whether a purchaser is in the dominant position in terms of supply-side substitutability.

The bargaining power gap would shrink if suppliers formed coalitions; the coalitions could become lawful under the Monopoly Regulation and Fair Trade Act if certain conditions are met. The key criterion is whether there are any harmful repercussions to social welfare. The double marginalization theory implies that group-bargaining reduces social surplus, but this study shows that social surplus may not decrease as much as expected, especially when the final good market is competitive. Moreover, there is no welfare loss if suppliers’ coalitions are paid a share of the margin in addition to their marginal costs. Therefore, as a precondition to legitimize the coalitions, the government must force the contracting parties to divide the margin and to make their own cost structures transparent to the other parties for verification of the exact margin.

SITEMAP

HOT ISSUE

Summary

Summary

Summary

Summary

Summary

Summary

Summary

Summary

Summary