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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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    Bibliographic Info

    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. Dean Karlan & Jonathan Zinman, 2010. "Expanding Credit Access: Using Randomized Supply Decisions to Estimate the Impacts," Review of Financial Studies, Society for Financial Studies, vol. 23(1), pages 433-464, January.
    2. Oliver Hart & John Moore, 1997. "Default and Renegotiation: A Dynamic Model of Debt," Harvard Institute of Economic Research Working Papers 1792, Harvard - Institute of Economic Research.
    3. Astrid A. Dick & Andreas Lehnert, 2010. "Personal Bankruptcy and Credit Market Competition," Journal of Finance, American Finance Association, vol. 65(2), pages 655-686, 04.
    4. Ian Domowitz & Robert L. Sartain, 1999. "Determinants of the Consumer Bankruptcy Decision," Journal of Finance, American Finance Association, vol. 54(1), pages 403-420, 02.
    5. Michelle J. White, 2007. "Bankruptcy Reform and Credit Cards," Journal of Economic Perspectives, American Economic Association, vol. 21(4), pages 175-200, Fall.
    6. Mark Furletti, 2003. "Credit card pricing developments and their disclosure," Payment Cards Center Discussion Paper 03-02, Federal Reserve Bank of Philadelphia.
    7. 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.
    8. 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 QAU09-2, Federal Reserve Bank of Boston.
    9. Michelle J. White, 2007. "Bankruptcy Reform and Credit Cards," NBER Working Papers 13265, National Bureau of Economic Research, Inc.
    10. Donald P. Morgan & Michael R. Strain, 2008. "How household fare after payday credit banks," Proceedings 1083, Federal Reserve Bank of Chicago.
    11. Scott Fay & Erik Hurst & Michelle J. White, 2002. "The Household Bankruptcy Decision," American Economic Review, American Economic Association, vol. 92(3), pages 706-718, June.
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