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The economics of debt collection: enforcement of consumer credit contracts

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  • Fedaseyeu, Viktar

    (Federal Reserve Bank of Philadelphia)

  • Hunt, Robert M.

    (Federal Reserve Bank of Philadelphia)

Abstract

In the U.S., third-party debt collection agencies employ more than 140,000 people and recover more than $50 billion each year, mostly from consumers. Informational, legal, and other factors suggest that original creditors should have an advantage in collecting debts owed to them. Then, why does the debt collection industry exist and why is it so large? Explanations based on economies of scale or specialization cannot address many of the observed stylized facts. The authors develop an application of common agency theory that better explains those facts. The model explains how reliance on an unconcentrated industry of third-party debt collection agencies can implement an equilibrium with more intense collections activity than creditors would implement by themselves. The authors derive empirical implications for the nature of the debt collection market and the structure of the debt collection industry. A welfare analysis shows that, under certain conditions, an equilibrium in which creditors rely on third-party debt collectors can generate more credit supply and aggregate borrower surplus than an equilibrium where lenders collect debts owed to them on their own. There are, however, situations where the opposite is true. The model also suggests a number of policy instruments that may improve the functioning of the collections market.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 14-7.

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Length: 46 pages
Date of creation: 01 Mar 2014
Date of revision:
Handle: RePEc:fip:fedpwp:14-7

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Related research

Keywords: Debt collection; contract enforcement; consumer credit markets; regulation of credit markets; credit cards; bank reputation; FDCPA;

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  1. Barth, James R & Cordes, Joseph J & Yezer, Anthony M J, 1986. "Benefits and Costs of Legal Restrictions on Personal Loan Markets," Journal of Law and Economics, University of Chicago Press, vol. 29(2), pages 357-80, October.
  2. Michelle J. White, 2007. "Bankruptcy Reform and Credit Cards," NBER Working Papers 13265, National Bureau of Economic Research, Inc.
  3. 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.
  4. 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.
  5. B. Douglas Bernheim & Michael D. Whinston, 1985. "Common Marketing Agency as a Device for Facilitating Collusion," RAND Journal of Economics, The RAND Corporation, vol. 16(2), pages 269-281, Summer.
  6. White, M.J., 1998. "Why Don't More Households File for Bankruptcy?," Papers 98-03, Michigan - Center for Research on Economic & Social Theory.
  7. Michelle J. White, 2007. "Bankruptcy Reform and Credit Cards," Journal of Economic Perspectives, American Economic Association, vol. 21(4), pages 175-200, Fall.
  8. Reint Gropp & John Karl Scholz & Michelle White, 1996. "Personal Bankruptcy and Credit Supply and Demand," NBER Working Papers 5653, National Bureau of Economic Research, Inc.
  9. Barth, James R, et al, 1983. " The Effect of Government Regulations on Personal Loan Markets: A Tobit Estimation of a Microeconomic Model," Journal of Finance, American Finance Association, vol. 38(4), pages 1233-51, September.
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