The Economics of Debt Collection: Enforcement of Consumer Credit Contracts

54 Pages Posted: 7 Feb 2018

See all articles by Viktar Fedaseyeu

Viktar Fedaseyeu

China Europe International Business School (CEIBS)

Robert M. Hunt

Consumer Finance Institute, Federal Reserve Bank of Philadelphia

Multiple version iconThere are 3 versions of this paper

Date Written: 2015-11-01

Abstract

Superceded by WP 18-04 In the U.S., creditors often outsource the task of obtaining repayment from defaulting borrowers to third-party debt collection agencies. This paper argues that an important incentive for this is creditors' concerns about their reputations. Using a model along the lines of the common agency framework, we show that, under certain conditions, debt collection agencies use harsher debt collection practices than original creditors would use on their own. This appears to be consistent with empirical evidence. The model also fits several other empirical facts about the structure of the debt collection industry and its evolution over time. We show that the existence of third-party debt collectors may improve consumer welfare if credit markets contain a sufficiently large share of opportunistic borrowers who would not repay their debts unless faced with \harsh" debt collection practices. In other cases, the presence of third-party debt collectors can result in lower consumer welfare. The model provides insight into which policy interventions may improve the functioning of the collections market.

Keywords: Debt collection, Contract enforcement, Consumer credit markets, Regulation of credit markets, Credit cards, Fair Debt

JEL Classification: D18, G28, L24

Suggested Citation

Fedaseyeu, Viktar and Hunt, Robert M., The Economics of Debt Collection: Enforcement of Consumer Credit Contracts (2015-11-01). FRB of Philadelphia Working Paper No. 15-43, Available at SSRN: https://ssrn.com/abstract=3117345

Viktar Fedaseyeu (Contact Author)

China Europe International Business School (CEIBS) ( email )

Shanghai-Hongfeng Road
Shanghai 201206
Shanghai 201206
China

HOME PAGE: http://https://www.ceibs.edu/fviktar

Robert M. Hunt

Consumer Finance Institute, Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States
215-574-3806 (Phone)
215-574-7101 (Fax)

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