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Debt collection agencies and the supply of consumer credit

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  • Fedaseyeu, Viktar

Abstract

Superseded by Working Paper 15-23 I examine contract enforcement in consumer credit markets by studying the role of third-party debt collectors. In order to identify the effect of debt collectors on credit supply, I construct a state-level index of the tightness of debt collection laws. I find that stricter regulations of third-party debt collectors are associated with a lower number of third-party debt collectors per capita and with fewer openings of revolving lines of credit. One additional restriction on debt collection activity reduces the number of debt collectors per capita by 15.9% of the sample mean and lowers the number of new revolving lines of credit by 2.2% of the sample mean. At the same time, regulations of third-party debt collectors do not affect secured consumer credit, which is consistent with the fact that debt collectors are used to enforce unsecured debt contracts. Stricter regulations of debt collectors decrease credit card recovery rates (by 9% of the sample mean for each additional restriction on debt collection activity), which appears to be the transmission mechanism by which debt collectors affect credit supply. The effect of debt collection laws is significant even when average credit scores are controlled for, meaning that consumer credit risk is not the only driver of credit access. My results can help explain the existence of a large market for unsecured consumer credit and shed light on contract enforcement in this market.

Suggested Citation

  • Fedaseyeu, Viktar, 2013. "Debt collection agencies and the supply of consumer credit," Working Papers 13-38, Federal Reserve Bank of Philadelphia, revised 25 Aug 2015.
  • Handle: RePEc:fip:fedpwp:13-38
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    Cited by:

    1. 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.
    2. 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.
    3. Satyajit Chatterjee, 2010. "An Equilibrium Model of the Timing of Bankruptcy Filings," 2010 Meeting Papers 1282, Society for Economic Dynamics.
    4. Lukasz A. Drozd & Ricardo Serrano-Padial, 2017. "Modeling the Revolving Revolution: The Debt Collection Channel," American Economic Review, American Economic Association, vol. 107(3), pages 897-930, March.
    5. repec:bis:bisifc:45-08 is not listed on IDEAS
    6. Fonseca, Julia & Strair, Katherine & Zafar, Basit, 2017. "Access to credit and financial health: evaluating the impact of debt collection," Staff Reports 814, Federal Reserve Bank of New York.
    7. Fabio Schiantarelli & Massimiliano Stacchini & Philip E. Strahan, 2016. "Bank Quality, Judicial Efficiency and Borrower Runs: Loan Repayment Delays in Italy," NBER Working Papers 22034, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    Household finance; Consumer credit; Lender protection; Creditor rights; Contract enforcement; Debt collection; Law and finance;

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law

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