The Korean Economic Review
Two-Dimensional Self-Selection of Borrowers
Sung Hyun Kim (Ewha Womans University)Year 2019Vol. 35No. 1
AbstractThe multi-dimensional heterogeneity of agents can provide interesting insights. Toillustrate this point in the loan market context, we examine the borrowers’ decision to switchfrom a variable rate loan to a fixed rate loan, using a model of two-dimensional borrowertypes (risk aversion and riskiness). Among high risk borrowers, more risk averse ones areselected out of the loan market and less risk averse ones are not tempted by the fixed rateloan. Switchers are more risk averse but have lower default risk. The Financial ServicesCommission’s 2015 Mortgage Refinancing Program in Korea is discussed under our model’sframework.