Home About Latest Browse RSS Advanced Search

Federal Reserve Bank of Philadelphia
Working Papers
The economics of debt collection: enforcement of consumer credit contracts
Viktar Fedaseyeu
Robert M. Hunt

Superceded by WP 18-04 In the U.S., creditors often outsource the task of obtaining repayment from defaulting borrowers to third-party debt collection agencies.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.

Download Full text
Cite this item
Viktar Fedaseyeu & Robert M. Hunt, The economics of debt collection: enforcement of consumer credit contracts, Federal Reserve Bank of Philadelphia, Working Papers 15-43, 01 Nov 2015, revised 29 Jan 2018.
More from this series
JEL Classification:
Subject headings:
Keywords: Debt collection; Contract enforcement; Consumer credit markets; Regulation of credit markets; Credit cards; Fair Debt
For corrections, contact Beth Paul ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal