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American Economic Review Vol. 107 No. 3 2017

Modeling the Revolving Revolution: The Debt Collection Channel

Lukasz A. Drozd1; Ricardo Serrano-Padial2

1 Research Department, Federal Reserve Bank of Philadelphia, Ten Independence Mall, Philadelphia, PA 19106 (e-mail: ) · 2 School of Economics, Lebow College of Business, Drexel University, 3220 Market Street, Philadelphia, PA 19104 (e-mail: )

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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.

DOI
10.1257/aer.20131029
Volume
107
Issue
3
Pages
897-930
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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