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The Economics of Debt Collection: Enforcement of Consumer Credit Contracts

Author

Listed:
  • Robert Hunt

    (Federal Reserve Bank of Philadelphia)

  • Viktar Fedaseyeu

    (Bocconi University)

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. We 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. We 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

  • Robert Hunt & Viktar Fedaseyeu, 2015. "The Economics of Debt Collection: Enforcement of Consumer Credit Contracts," 2015 Meeting Papers 1244, Society for Economic Dynamics.
  • Handle: RePEc:red:sed015:1244
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    References listed on IDEAS

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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. Jonathan Zinman, 2015. "Household Debt: Facts, Puzzles, Theories, and Policies," Annual Review of Economics, Annual Reviews, vol. 7(1), pages 251-276, August.
    3. Lawrence Santucci, 2015. "A tale of two vintages: credit limit management before and after the CARD act and Great Recession," Consumer Finance Institute discussion papers 15-1, Federal Reserve Bank of Philadelphia.
    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. Igor Livshits, 2015. "Recent Developments In Consumer Credit And Default Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 29(4), pages 594-613, September.
    6. Kamil ROMAN, 2018. "Payment Monitoring As A Leading Issue In The Operation Of Transport Companies In Poland," Transport Problems, Silesian University of Technology, vol. 13(4), pages 5-12, December.
    7. Julia Fonseca & Katherine Strair & Basit Zafar, 2017. "Access to credit and financial health: evaluating the impact of debt collection," Staff Reports 814, Federal Reserve Bank of New York.
    8. Johannes Kriebel & Kevin Yam, 2020. "Forecasting recoveries in debt collection: Debt collectors and information production," European Financial Management, European Financial Management Association, vol. 26(3), pages 537-559, June.

    More about this item

    JEL classification:

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

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