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The Economics of Debt Collection: Enforcement of Consumer Credit Contracts

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  • Viktar Fedaseyeu
  • Robert M. Hunt

Abstract

Creditors often outsource the task of obtaining repayment from defaulting borrowers to third-party debt collectors. We argue that by hiring third-party debt collectors, creditors can avoid competing in terms of their debt collection practices. This explanation fits several empirical facts about third-party debt collection and is consistent with the evidence that third-party debt collectors use harsher debt collection practices than original creditors. Our model shows that the impact of third-party debt collectors on consumer welfare depends on the riskiness of the pool of borrowers and provides insights into which policy interventions may improve the functioning of the debt collection market.

Suggested Citation

  • Viktar Fedaseyeu & Robert M. Hunt, 2018. "The Economics of Debt Collection: Enforcement of Consumer Credit Contracts," Working Papers 18-4, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:18-4
    DOI: https://doi.org/10.21799/frbp.wp.2018.04
    Note: Supersedes working paper # 15-43
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    Cited by:

    1. Nazemi, Abdolreza & Rezazadeh, Hani & Fabozzi, Frank J. & Höchstötter, Markus, 2022. "Deep learning for modeling the collection rate for third-party buyers," International Journal of Forecasting, Elsevier, vol. 38(1), pages 240-252.
    2. Viktar Fedaseyeu, 2012. "Debt Collection Agencies and the Supply of Consumer Credit," Working Papers 442, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    3. Jonathan Zinman, 2015. "Household Debt: Facts, Puzzles, Theories, and Policies," Annual Review of Economics, Annual Reviews, vol. 7(1), pages 251-276, August.
    4. 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.
    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. 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.
    8. Igor Livshits, 2015. "Recent Developments In Consumer Credit And Default Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 29(4), pages 594-613, September.
    9. Kamil ROMAN, 2018. "Payment Monitoring As A Leading Issue In The Operation Of Transport Companies In Poland," Transport Problems, Silesian University of Technology, Faculty of Transport, vol. 13(4), pages 5-12, December.
    10. 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.
    11. 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.

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    More about this item

    Keywords

    debt collection; contract enforcement; consumer credit markets; regulation of credit markets; credit cards; Fair Debt Collections Practices Act;
    All these keywords.

    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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