IDEAS home Printed from https://ideas.repec.org/p/fip/fedpwp/13-38.html
   My bibliography  Save this paper

Debt collection agencies and the supply of consumer credit

Author

Listed:
  • Viktar Fedaseyeu

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Superseded by Working Paper 15-23 I examine contract enforcement in consumer credit markets by studying the role of third-party debt collectors.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

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

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Kartik Athreya & Juan M. Sánchez & Xuan S. Tam & Eric R. Young, 2018. "Bankruptcy And Delinquency In A Model Of Unsecured Debt," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 59(2), pages 593-623, May.
    2. Reint Gropp & John Karl Scholz & Michelle J. White, 1997. "Personal Bankruptcy and Credit Supply and Demand," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(1), pages 217-251.
    3. Caskey, John P, 1991. "Pawnbroking in America: The Economics of a Forgotten Credit Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(1), pages 85-99, February.
    4. Kurt Mitman, 2011. "Macroeconomic Effects of Bankruptcy & Foreclosure Policies," PIER Working Paper Archive 11-015, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    5. Christopher R. Knittel & Victor Stango, 2003. "Price Ceilings as Focal Points for Tacit Collusion: Evidence from Credit Cards," American Economic Review, American Economic Association, vol. 93(5), pages 1703-1729, December.
    6. Karlan, Dean S. & Zinman, Jonathan, 2009. "Expanding Microenterprise Credit Access: Using Randomized Supply Decisions to Estimate the Impacts in Manila," Center Discussion Papers 52600, Yale University, Economic Growth Center.
    7. Djankov, Simeon & McLiesh, Caralee & Shleifer, Andrei, 2007. "Private credit in 129 countries," Journal of Financial Economics, Elsevier, vol. 84(2), pages 299-329, May.
    8. Oliver Hart & John Moore, 1998. "Default and Renegotiation: A Dynamic Model of Debt," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(1), pages 1-41.
    9. Ethan Cohen-Cole & Burcu Duygan-Bump & Judit Montoriol-Garriga, 2009. "Forgive and forget: who gets credit after bankruptcy and why?," Supervisory Research and Analysis Working Papers QAU09-2, Federal Reserve Bank of Boston.
    10. Dean Karlan & Jonathan Zinman, 2010. "Expanding Credit Access: Using Randomized Supply Decisions to Estimate the Impacts," The Review of Financial Studies, Society for Financial Studies, vol. 23(1), pages 433-464, January.
    11. John Y. Campbell & Howell E. Jackson & Brigitte C. Madrian & Peter Tufano, 2011. "Consumer Financial Protection," Journal of Economic Perspectives, American Economic Association, vol. 25(1), pages 91-114, Winter.
    12. David Laibson & Andrea Repetto & Jeremy Tobacman, 2005. "Estimating Discount Functions with Consumption Choices over the Lifecycle," Levine's Bibliography 784828000000000643, UCLA Department of Economics.
    13. Lusardi, Annamaria & Tufano, Peter, 2015. "Debt literacy, financial experiences, and overindebtedness," Journal of Pension Economics and Finance, Cambridge University Press, vol. 14(4), pages 332-368, October.
    14. Karlan, Dean & Zinman, Jonathan, 2009. "Expanding Microenterprise Credit Access: Randomized Supply Decisions to Estimate the Impacts in Manila," Working Papers 68, Yale University, Department of Economics.
    15. Zinman, Jonathan, 2010. "Restricting consumer credit access: Household survey evidence on effects around the Oregon rate cap," Journal of Banking & Finance, Elsevier, vol. 34(3), pages 546-556, March.
    16. Calem, Paul S & Mester, Loretta J, 1995. "Consumer Behavior and the Stickiness of Credit-Card Interest Rates," American Economic Review, American Economic Association, vol. 85(5), pages 1327-1336, December.
    17. Donald P. Morgan & Michael R. Strain, 2008. "How household fare after payday credit banks," Proceedings 1083, Federal Reserve Bank of Chicago.
    18. Scott Fay & Erik Hurst & Michelle J. White, 2002. "The Household Bankruptcy Decision," American Economic Review, American Economic Association, vol. 92(3), pages 706-718, June.
    19. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. "Law and Finance," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1113-1155, December.
    20. Sumit Agarwal & Souphala Chomsisengphet & Neale Mahoney & Johannes Stroebel, 2015. "Regulating Consumer Financial Products: Evidence from Credit Cards," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 130(1), pages 111-164.
    21. Astrid A. Dick & Andreas Lehnert, 2010. "Personal Bankruptcy and Credit Market Competition," Journal of Finance, American Finance Association, vol. 65(2), pages 655-686, April.
    22. Berkowitz, Jeremy & Hynes, Richard, 1999. "Bankruptcy Exemptions and the Market for Mortgage Loans," Journal of Law and Economics, University of Chicago Press, vol. 42(2), pages 809-830, October.
    23. Brian T. Melzer, 2011. "The Real Costs of Credit Access: Evidence from the Payday Lending Market," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 126(1), pages 517-555.
    24. Simeon Djankov & Oliver Hart & Caralee McLiesh & Andrei Shleifer, 2008. "Debt Enforcement around the World," Journal of Political Economy, University of Chicago Press, vol. 116(6), pages 1105-1149, December.
    25. Ausubel, Lawrence M, 1991. "The Failure of Competition in the Credit Card Market," American Economic Review, American Economic Association, vol. 81(1), pages 50-81, March.
    26. Lin, Emily Y. & White, Michelle J., 2001. "Bankruptcy and the Market for Mortgage and Home Improvement Loans," Journal of Urban Economics, Elsevier, vol. 50(1), pages 138-162, July.
    27. Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2004. "How Much Should We Trust Differences-In-Differences Estimates?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(1), pages 249-275.
    28. 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.
    29. Makoto Nakajima, 2013. "A tale of two commitments: equilibrium default and temptation," Working Papers 14-1, Federal Reserve Bank of Philadelphia.
    30. Viktar Fedaseyeu & Robert M. Hunt, 2014. "The economics of debt collection: enforcement of consumer credit contracts," Working Papers 14-7, Federal Reserve Bank of Philadelphia.
    31. Robert M. Hunt, 2007. "Collecting consumer debt in America," Business Review, Federal Reserve Bank of Philadelphia, issue Q2, pages 11-24.
    32. Jith Jayaratne & Philip E. Strahan, 1996. "The Finance-Growth Nexus: Evidence from Bank Branch Deregulation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 111(3), pages 639-670.
    33. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert, 2000. "Investor protection and corporate governance," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 3-27.
    34. Lukasz Drozd, 2013. "Modeling the Credit Card Revolution: The Role of Debt Collection and Informal Bankruptcy," 2013 Meeting Papers 1076, Society for Economic Dynamics.
    35. Bolton, Patrick & Scharfstein, David S, 1990. "A Theory of Predation Based on Agency Problems in Financial Contracting," American Economic Review, American Economic Association, vol. 80(1), pages 93-106, March.
    36. Paul Heidhues & Botond Koszegi, 2010. "Exploiting Naivete about Self-Control in the Credit Market," American Economic Review, American Economic Association, vol. 100(5), pages 2279-2303, December.
    37. Michelle J. White, 2007. "Bankruptcy Reform and Credit Cards," Journal of Economic Perspectives, American Economic Association, vol. 21(4), pages 175-200, Fall.
    38. Morse, Adair, 2011. "Payday lenders: Heroes or villains?," Journal of Financial Economics, Elsevier, vol. 102(1), pages 28-44, October.
    39. Agarwal, Sumit & Liu, Chunlin & Mielnicki, Lawrence, 2003. "Exemption laws and consumer delinquency and bankruptcy behavior: an empirical analysis of credit card data," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(2), pages 273-289.
    40. Justine S. Hastings & Brigitte C. Madrian & William L. Skimmyhorn, 2013. "Financial Literacy, Financial Education, and Economic Outcomes," Annual Review of Economics, Annual Reviews, vol. 5(1), pages 347-373, May.
    41. Scott, Jonathan A. & Smith, Terence C., 1986. "The effect of the Bankruptcy Reform Act of 1978 on small business loan pricing," Journal of Financial Economics, Elsevier, vol. 16(1), pages 119-140, May.
    42. Mark Furletti, 2003. "Credit card pricing developments and their disclosure," Consumer Finance Institute discussion papers 03-02, Federal Reserve Bank of Philadelphia.
    43. Bubb, Ryan & Kaufman, Alex, 2013. "Consumer biases and mutual ownership," Journal of Public Economics, Elsevier, vol. 105(C), pages 39-57.
    44. Donald P. Morgan & Michael R. Strain, 2007. "Payday holiday: how households fare after payday credit bans," Staff Reports 309, Federal Reserve Bank of New York.
    45. Lucas C. Coffman, 2011. "Intermediation Reduces Punishment (and Reward)," American Economic Journal: Microeconomics, American Economic Association, vol. 3(4), pages 77-106, November.
    46. Calem, Paul S. & Gordy, Michael B. & Mester, Loretta J., 2006. "Switching costs and adverse selection in the market for credit cards: New evidence," Journal of Banking & Finance, Elsevier, vol. 30(6), pages 1653-1685, June.
    47. Michelle J. White, 2007. "Bankruptcy Reform and Credit Cards," NBER Working Papers 13265, National Bureau of Economic Research, Inc.
    48. Ian Domowitz & Robert L. Sartain, 1999. "Determinants of the Consumer Bankruptcy Decision," Journal of Finance, American Finance Association, vol. 54(1), pages 403-420, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Adrien Auclert & Will S. Dobbie & Paul Goldsmith-Pinkham, 2019. "Macroeconomic Effects of Debt Relief: Consumer Bankruptcy Protections in the Great Recession," NBER Working Papers 25685, National Bureau of Economic Research, Inc.
    2. Distaso, Walter & Roccazzella, Francesco & Vrins, Frédéric, 2023. "Business cycle and realized losses in the consumer credit industry," LIDAM Discussion Papers LFIN 2023007, Université catholique de Louvain, Louvain Finance (LFIN).
    3. 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.
    4. Viktar Fedaseyeu & Robert M. Hunt, 2014. "The economics of debt collection: enforcement of consumer credit contracts," Working Papers 14-7, Federal Reserve Bank of Philadelphia.
    5. LaVoice, Jessica & Vamossy, Domonkos F., 2024. "Racial disparities in debt collection," Journal of Banking & Finance, Elsevier, vol. 164(C).
    6. Julia Fonseca, 2023. "Less Mainstream Credit, More Payday Borrowing? Evidence from Debt Collection Restrictions," Journal of Finance, American Finance Association, vol. 78(1), pages 63-103, February.
    7. Leong, Kaiwen & Li, Huailu & Pavanini, Nicola & Walsh, Christoph, 2022. "The Effects of Policy Interventions to Limit Illegal Money Lending," CEPR Discussion Papers 16779, C.E.P.R. Discussion Papers.
    8. Leong, Kaiwen & Li, Huailu & Pavanini, Nicola & Walsh, Christoph, 2024. "The effects of policy interventions to limit illegal money lending," Journal of Financial Economics, Elsevier, vol. 159(C).
    9. Pattison, Nathaniel, 2020. "Consumption smoothing and debtor protections," Journal of Public Economics, Elsevier, vol. 192(C).
    10. Fabio Schiantarelli & Massimiliano Stacchini & Philip E. Strahan, 2020. "Bank Quality, Judicial Efficiency, and Loan Repayment Delays in Italy," Journal of Finance, American Finance Association, vol. 75(4), pages 2139-2178, August.
    11. Satyajit Chatterjee, 2010. "An Equilibrium Model of the Timing of Bankruptcy Filings," 2010 Meeting Papers 1282, Society for Economic Dynamics.
    12. 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.
    13. Igor Livshits, 2015. "Recent Developments In Consumer Credit And Default Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 29(4), pages 594-613, September.
    14. Fabio Schiantarelli & Massimiliano Stacchini & Philip E. Strahan, 2017. "Bank quality, judicial efficiency and borrower runs: loan repayment delays in Italy," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Uses of central balance sheet data offices' information, volume 45, Bank for International Settlements.
    15. Xie, Jiaping & Wei, Lihong & Zhu, Weijun & Zhang, Weisi, 2021. "Platform supply chain pricing and financing: Who benefits from e-commerce consumer credit?," International Journal of Production Economics, Elsevier, vol. 242(C).
    16. 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.
    17. Romeo, Charles & Sandler, Ryan, 2021. "The effect of debt collection laws on access to credit," Journal of Public Economics, Elsevier, vol. 195(C).
    18. Arbel, Yonathan A., 2016. "Shielding of assets and lending contracts," International Review of Law and Economics, Elsevier, vol. 48(C), pages 26-35.
    19. 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.
    20. Pamela A. Tongo & Deogracia B. Corpuz & Leonora L. Caminade, 2017. "Factors Affecting the Collection Efficiency of Ma-a Parish Multi-PurposeCooperative: Basis for Policy Formulation," International Journal of Business and Economic Affairs (IJBEA), Sana N. Maswadeh, vol. 2(4), pages 240-252.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Fedaseyeu, Viktar, 2020. "Debt collection agencies and the supply of consumer credit," Journal of Financial Economics, Elsevier, vol. 138(1), pages 193-221.
    2. Viktar Fedaseyeu & Robert M. Hunt, 2014. "The economics of debt collection: enforcement of consumer credit contracts," Working Papers 14-7, Federal Reserve Bank of Philadelphia.
    3. Danisewicz, Piotr & Elard, Ilaf, 2023. "The real effects of financial technology: Marketplace lending and personal bankruptcy," Journal of Banking & Finance, Elsevier, vol. 155(C).
    4. Igor Livshits, 2015. "Recent Developments In Consumer Credit And Default Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 29(4), pages 594-613, September.
    5. Peter Debbaut & Andra C. Ghent & Marianna Kudlyak, 2013. "Are young borrowers bad borrowers? Evidence from the Credit CARD Act of 2009," Working Paper 13-09, Federal Reserve Bank of Richmond.
    6. Geraldo Cerqueiro & María Fabiana Penas, 2017. "How Does Personal Bankruptcy Law Affect Startups?," The Review of Financial Studies, Society for Financial Studies, vol. 30(7), pages 2523-2554.
    7. Aloisio Araujo & Bruno Funchal, 2015. "How Much Should Debtors be Punished in Case of Default?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 47(2), pages 229-245, April.
    8. Rajashri Chakrabarti & Nathaniel Pattison, 2019. "Auto Credit and the 2005 Bankruptcy Reform: The Impact of Eliminating Cramdowns," The Review of Financial Studies, Society for Financial Studies, vol. 32(12), pages 4734-4766.
    9. Daniel Grodzicki & Alexei Alexandrov & Özlem Bedre-Defolie & Sergei Koulayev, 2023. "Consumer Demand for Credit Card Services," Journal of Financial Services Research, Springer;Western Finance Association, vol. 63(3), pages 273-311, June.
    10. Song Han & Geng Li, 2011. "Household Borrowing after Personal Bankruptcy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 491-517, March.
    11. Cash, Alyxandra & Tsai, Hui-Ju, 2018. "Readability of the credit card agreements and financial charges," Finance Research Letters, Elsevier, vol. 24(C), pages 145-150.
    12. Zinman, Jonathan, 2010. "Restricting consumer credit access: Household survey evidence on effects around the Oregon rate cap," Journal of Banking & Finance, Elsevier, vol. 34(3), pages 546-556, March.
    13. Garber, Gabriel & Mian, Atif & Ponticelli, Jacopo & Sufi, Amir, 2024. "Consumption smoothing or consumption binging? The effects of government-led consumer credit expansion in Brazil," Journal of Financial Economics, Elsevier, vol. 156(C).
    14. Berger, Allen N. & Cerqueiro, Geraldo & Penas, María F., 2011. "Does debtor protection really protect debtors? Evidence from the small business credit market," Journal of Banking & Finance, Elsevier, vol. 35(7), pages 1843-1857, July.
    15. Dean Karlan & Jonathan Zinman, 2010. "Expanding Credit Access: Using Randomized Supply Decisions to Estimate the Impacts," The Review of Financial Studies, Society for Financial Studies, vol. 23(1), pages 433-464, January.
    16. Benjamin B Boozer & S. Keith Lowe & Robert J. Landry III, 2014. "Personal Financial Decisions: A Study of Changes in Homestead Exemption Levels and Consumer Bankruptcy Choices," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 8(4), pages 17-26.
    17. Charles Grant, 2021. "The Evolution of Arrears among US Households 1995–2013," JRFM, MDPI, vol. 14(2), pages 1-40, January.
    18. Sane Renuka & Thomas Susan, 2016. "The Real Cost of Credit Constraints: Evidence from Micro-finance," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 16(1), pages 151-183, January.
    19. Daniel Kandie & Khan Jahirul Islam, 2022. "A new era of microfinance: The digital microcredit and its impact on poverty," Journal of International Development, John Wiley & Sons, Ltd., vol. 34(3), pages 469-492, April.
    20. Daniel Hojman & Alvaro Miranda & Jaime Ruiz-Tagle, 2013. "Over Indebtedness and Depression: Sad Debt or Sad Debtors?," Working Papers wp385, University of Chile, Department of Economics.

    More about this item

    Keywords

    Household finance; Consumer credit; Lender protection; Creditor rights; Contract enforcement; Debt collection; Law and finance;
    All these keywords.

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedpwp:13-38. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Beth Paul (email available below). General contact details of provider: https://edirc.repec.org/data/frbphus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.