Working Paper

Modeling the Revolving Revolution: The Debt Collection Channel


Abstract: We investigate the role of information technology (IT) in the collection of delinquent consumer debt. We argue that the widespread adoption of IT by the debt collection industry in the 1990s contributed to the observed expansion of unsecured risky lending such as credit cards. Our model stresses the importance of delinquency and private information about borrower solvency. The prevalence of delinquency implies that the costs of debt collection must be borne by lenders to sustain incentives to repay debt. IT mitigates informational asymmetries, allowing lenders to concentrate collection efforts on delinquent borrowers who are more likely to repay.

Keywords: credit cards; costly state verification; consumer credit; moral hazard; debt collection; information technology; revolving credit; unsecured credit; informal bankruptcy;

JEL Classification: D91; G20; E21;

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Bibliographic Information

Provider: Federal Reserve Bank of Philadelphia

Part of Series: Working Papers

Publication Date: 2017-01-12

Number: 17-2

Pages: 55 pages