Reverse Mortgage in China Based on Game Theory

Abstract: The elderly population ratio in China had a continuous increasing trend in the past decade, which means that Chinese society has gradually entered an “aging society”. Lack of corresponding pension policies, huge population base and change in family structures all let the government bear huge pension pressure. The implementation of reverse mortgages in China can effectively solve this problem and alleviate the government's financial pressure. Reverse mortgage is an emerging industry in China, which is a loan available to homeowners, 62 years or older, that allows them to convert part of the equity in their homes into cash. In order to analyze the feasibility of reverse mortgage in China, we use both quantitative and qualitative model to study the impact factors of reverse mortgage. Firstly, we build a three-party game matrix model among the government, customers (old people) and financial institutions to study how changes in different influencing factors affect the decision-making of each participant. Then, we introduce asymmetric information factors and build a two-party incomplete information game theory model between customers and financial institutions. Then, we refine the impact factors mentioned above to study the relationship among different factors and make a pricing function for financial institutions. Based on the above models, we can provide some relevant suggestions for financial institutions about how to price the annual pension amount and determine the penalty amount if the customer provide a fake health certificate.