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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

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.

Suggested Citation

  • Lukasz A. Drozd & Ricardo Serrano-Padial, 2013. "Modeling the credit card revolution: the role of debt collection and informal bankruptcy," Working Papers 13-12, Federal Reserve Bank of Philadelphia.
  • Handle: RePEc:fip:fedpwp:13-12
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    References listed on IDEAS

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    1. Igor Livshits & James MacGee & Michèle Tertilt, 2010. "Accounting for the Rise in Consumer Bankruptcies," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 165-193, April.
    2. 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 22 Dec 2016.
    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. Xavier Mateos-Planas & David Benjamin, 2012. "Formal vs. Informal Default in Consumer Credit," 2012 Meeting Papers 144, Society for Economic Dynamics.
    5. Viktar Fedaseyeu, 2012. "Debt Collection Agencies and the Supply of Consumer Credit," Working Papers 442, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    6. Jim MacGee & Igor Livshits & Michele Tertilt, 2008. "Costly Contracts and Consumer Credit," 2008 Meeting Papers 385, Society for Economic Dynamics.
    7. White, M.J., 1998. "Why Don't More Households File for Bankruptcy?," Papers 98-03, Michigan - Center for Research on Economic & Social Theory.
    8. Kyle F. Herkenhoff, 2012. "Informal unemployment insurance and labor market dynamics," Working Papers 2012-057, Federal Reserve Bank of St. Louis.
    9. Satyajit Chatterjee, 2010. "An Equilibrium Model of the Timing of Bankruptcy Filings," 2010 Meeting Papers 1282, Society for Economic Dynamics.
    10. Michelle J. White, 2007. "Bankruptcy Reform and Credit Cards," NBER Working Papers 13265, National Bureau of Economic Research, Inc.
    11. Juan M. Sánchez, 2010. "The IT revolution and the unsecured credit market," Working Papers 2010-022, Federal Reserve Bank of St. Louis.
    12. 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 205-231, October.
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    Citations

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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. Fedaseyeu, Viktar & Hunt, Robert M., 2014. "The economics of debt collection: enforcement of consumer credit contracts," Working Papers 14-7, Federal Reserve Bank of Philadelphia.
    4. 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.
    5. 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.

    More about this item

    Keywords

    Credit cards ; Consumer credit ; Credit ; Moral hazard;

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