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Modeling the Credit Card Revolution: The Role of Debt Collection and Informal Bankruptcy

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  • Lukasz Drozd

    (University of Pennsilvania)

Abstract

We develop a model of credit card lending and consumer bankruptcy in which enforcement of debt repayment is endogenously determined within the lending industry. Our focus on enforcement of credit contracts is motivated by existing consumer debt collection practices, and is consistent with the recently documented informal nature of defaults on consumer debt. We show that our approach enhances the ability of standard models of consumer bankruptcy to account for the high levels of indebtedness and defaults seen in the US. Our model also explains why progress in information technology within the credit card industry has lead to growing riskiness of credit card debt over the 90s -- a feature of the data that is puzzling from the perspective of the standard theories.

Suggested Citation

  • Lukasz Drozd, 2013. "Modeling the Credit Card Revolution: The Role of Debt Collection and Informal Bankruptcy," 2013 Meeting Papers 1076, Society for Economic Dynamics.
    • Handle: RePEc:red:sed013:1076
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    Cited by:

    1. Viktar Fedaseyeu, 2012. "Debt Collection Agencies and the Supply of Consumer Credit," Working Papers 442, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    2. Yuriy Gorodnichenko & Marianna Kudlyak & John Mondragon & Olivier Coibion, 2014. "Does Greater Inequality Lead to More Household Borrowing? New Evidence from Household Data," 2014 Meeting Papers 402, Society for Economic Dynamics.
    3. Viktar Fedaseyeu & Robert M. Hunt, 2014. "The economics of debt collection: enforcement of consumer credit contracts," Working Papers 14-7, Federal Reserve Bank of Philadelphia.
    4. Banuri, Sheheryar & Nguyen, Ha, 2023. "Borrowing to keep up (with the Joneses): Inequality, debt, and conspicuous consumption," Journal of Economic Behavior & Organization, Elsevier, vol. 206(C), pages 222-242.
    5. Luzzetti, Matthew N. & Neumuller, Seth, 2016. "Learning and the dynamics of consumer unsecured debt and bankruptcies," Journal of Economic Dynamics and Control, Elsevier, vol. 67(C), pages 22-39.
    6. Davis, Andrew & Kim, Jiseob, 2017. "Explaining changes in the US credit card market: Lenders are using more information," Economic Modelling, Elsevier, vol. 61(C), pages 76-92.

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