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Modeling the credit card revolution: the role of debt collection and informal bankruptcy

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  • Lukasz A. Drozd
  • Ricardo Serrano-Padial
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    Abstract

    In the data, most consumer defaults on unsecured credit are informal and the lending industry devotes significant resources to debt collection. We develop a new theory of credit card lending that takes these two features into account. The two key elements of our model are moral hazard and costly state verification that relies on the use of information technology. We show that the model gives rise to a novel channel through which IT progress can affect outcomes in the credit markets, and argue that this channel can be critical to understand the trends associated with the rapid expansion of credit card borrowing in the 1980s and over the 1990s. Independently, the mechanism of the model helps reconcile high levels of defaults and indebtedness observed in the US data.

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    File URL: http://www.philadelphiafed.org/research-and-data/publications/working-papers/2013/wp13-12.pdf
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    Bibliographic Info

    Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 13-12.

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    Date of creation: 2013
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    Handle: RePEc:fip:fedpwp:13-12

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    Related research

    Keywords: Credit cards ; Consumer credit ; Credit ; Moral hazard;

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    References

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    1. Kyle F. Herkenhoff, 2012. "Informal unemployment insurance and labor market dynamics," Working Papers 2012-057, Federal Reserve Bank of St. Louis.
    2. Igor Livshits & James MacGee & Michèle Tertilt, 2007. "Accounting for the Rise in Consumer Bankruptcies," NBER Working Papers 13363, National Bureau of Economic Research, Inc.
    3. Michelle J. White, 2007. "Bankruptcy Reform and Credit Cards," Journal of Economic Perspectives, American Economic Association, vol. 21(4), pages 175-200, Fall.
    4. White, M.J., 1998. "Why Don't More Households File for Bankruptcy?," Papers 98-03, Michigan - Center for Research on Economic & Social Theory.
    5. Livshits, Igor & MacGee, James & Tertilt, Michèle, 2011. "Costly Contracts and Consumer Credit," CEPR Discussion Papers 8580, C.E.P.R. Discussion Papers.
    6. Viktar Fedaseyeu, 2013. "Debt collection agencies and the supply of consumer credit," Working Papers 13-38, Federal Reserve Bank of Philadelphia.
    7. White, Michelle J, 1998. "Why Don't More Households File for Bankruptcy?," Journal of Law, Economics and Organization, Oxford University Press, vol. 14(2), pages 205-31, October.
    8. Xavier Mateos-Planas & David Benjamin, 2012. "Formal vs. Informal Default in Consumer Credit," 2012 Meeting Papers 144, Society for Economic Dynamics.
    9. Juan M. Sánchez, 2010. "The IT revolution and the unsecured credit market," Working Papers 2010-022, Federal Reserve Bank of St. Louis.
    10. Athreya, Kartik & Sánchez, Juan M. & Tam, Xuan S. & Young, Eric R., 2012. "Bankruptcy and delinquency in a model of unsecured debt," Working Papers 2012-042, Federal Reserve Bank of St. Louis, revised 30 Jan 2014.
    11. Michelle J. White, 2007. "Bankruptcy Reform and Credit Cards," NBER Working Papers 13265, National Bureau of Economic Research, Inc.
    12. Satyajit Chatterjee, 2010. "An Equilibrium Model of the Timing of Bankruptcy Filings," 2010 Meeting Papers 1282, Society for Economic Dynamics.
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