The Economics of Debt Collection: Enforcement of Consumer Credit Contracts

Fedaseyeu, Viktar; Hunt, Robert M.

doi:https://doi.org/10.21799/frbp.wp.2018.04

Working Paper

The Economics of Debt Collection: Enforcement of Consumer Credit Contracts

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.

Keywords: debt collection; contract enforcement; consumer credit markets; regulation of credit markets; credit cards; Fair Debt Collections Practices Act;

JEL Classification: D18; G28; L24;

https://doi.org/https://doi.org/10.21799/frbp.wp.2018.04