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Debt Collection Agencies and the Supply of Consumer Credit

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  • Viktar Fedaseyeu
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    Abstract

    I examine the role of third-party debt collectors in consumer credit markets. Using law enforcement as an instrument for the number of debt collectors, I find that higher density of debt collectors increases the supply of unsecured credit. The estimated elasticity of the average credit card balance with respect to the number of debt collectors per capita is 0.49, the elasticity of the average balance on non-credit card unsecured loans with respect to the number of debt collectors per capita is 1.32. I also find evidence that creditors substitute unsecured credit for secured credit when the number of debt collectors increases. Higher density of debt collectors improves recoveries, which enables lenders to extend morecredit. Finally, creditors charge higher interest rates and lend to a larger pool of borrowers when the density of debt collectors increases, presumably because better collections enable them to extend credit to riskier applicants.

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    Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 442.

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    Date of creation: 2012
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    Handle: RePEc:igi:igierp:442

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    1. Michelle J. White, 2007. "Bankruptcy Reform and Credit Cards," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 21(4), pages 175-200, Fall.
    2. Dean Karlan & Jonathan Zinman, 2006. "Expanding credit access: Using randomized supply decisions to estimate the impacts," Natural Field Experiments, The Field Experiments Website 00281, The Field Experiments Website.
    3. Oliver Hart & John Moore, 1997. "Default and Renegotiation: A Dynamic Model of Debt," STICERD - Theoretical Economics Paper Series, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE /1997/321, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    4. Gropp, Reint & Scholz, John Karl & White, Michelle J, 1997. "Personal Bankruptcy and Credit Supply and Demand," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 112(1), pages 217-51, February.
    5. Astrid Dick & Andreas Lehnert, 2007. "Personal bankruptcy and credit market competition," Staff Reports, Federal Reserve Bank of New York 272, Federal Reserve Bank of New York.
    6. Donald P. Morgan & Michael R. Strain, 2008. "How household fare after payday credit banks," Proceedings, Federal Reserve Bank of Chicago 1083, Federal Reserve Bank of Chicago.
    7. Ethan Cohen-Cole & Burcu Duygan-Bump & Judit Montoriol-Garriga, 2009. "Forgive and forget: who gets credit after bankruptcy and why?," Risk and Policy Analysis Unit Working Paper, Federal Reserve Bank of Boston QAU09-2, Federal Reserve Bank of Boston.
    8. Mark Furletti, 2003. "Credit card pricing developments and their disclosure," Payment Cards Center Discussion Paper, Federal Reserve Bank of Philadelphia 03-02, Federal Reserve Bank of Philadelphia.
    9. Ian Domowitz & Robert L. Sartain, 1999. "Determinants of the Consumer Bankruptcy Decision," Journal of Finance, American Finance Association, American Finance Association, vol. 54(1), pages 403-420, 02.
    10. Michelle J. White, 2007. "Bankruptcy Reform and Credit Cards," NBER Working Papers 13265, National Bureau of Economic Research, Inc.
    11. Scott Fay & Erik Hurst & Michelle J. White, 2002. "The Household Bankruptcy Decision," American Economic Review, American Economic Association, American Economic Association, vol. 92(3), pages 706-718, June.
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