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The economics of debt collection: enforcement of consumer credit contracts

Author

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  • Fedaseyeu, Viktar

    (Federal Reserve Bank of Philadelphia)

  • Hunt, Robert M.

    (Federal Reserve Bank of Philadelphia)

Abstract

In the U.S., third-party debt collection agencies employ more than 140,000 people and recover more than $50 billion each year, mostly from consumers. Informational, legal, and other factors suggest that original creditors should have an advantage in collecting debts owed to them. Then, why does the debt collection industry exist and why is it so large? Explanations based on economies of scale or specialization cannot address many of the observed stylized facts. The authors develop an application of common agency theory that better explains those facts. The model explains how reliance on an unconcentrated industry of third-party debt collection agencies can implement an equilibrium with more intense collections activity than creditors would implement by themselves. The authors derive empirical implications for the nature of the debt collection market and the structure of the debt collection industry. A welfare analysis shows that, under certain conditions, an equilibrium in which creditors rely on third-party debt collectors can generate more credit supply and aggregate borrower surplus than an equilibrium where lenders collect debts owed to them on their own. There are, however, situations where the opposite is true. The model also suggests a number of policy instruments that may improve the functioning of the collections market.

Suggested Citation

  • 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.
  • Handle: RePEc:fip:fedpwp:14-7
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    References listed on IDEAS

    as
    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.
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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. Igor Livshits, 2015. "Recent Developments In Consumer Credit And Default Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 29(4), pages 594-613, September.
    3. 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.
    4. Jonathan Zinman, 2014. "Household Debt: Facts, Puzzles, Theories, and Policies," NBER Working Papers 20496, National Bureau of Economic Research, Inc.
    5. 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.
    6. Santucci, Lawrence, 2015. "A tale of two vintages: credit limit management before and after the CARD act and Great Recession," Payment Cards Center Discussion Paper 15-1, Federal Reserve Bank of Philadelphia.

    More about this item

    Keywords

    Debt collection; contract enforcement; consumer credit markets; regulation of credit markets; credit cards; bank reputation; FDCPA;

    JEL classification:

    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures

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