The Korean Economic Review
Effects of Bad Debt Adjustment on Repayment: Evidence from the KR&C Data Set in South Korea
Namhyun Kim (Korea Deposit Insurance Corporation) and Sanha Noh (Jeonbuk National University)Year 2022Vol. 38No. 3
AbstractThis 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 non- beneficiaries 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.