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. (JEL D14, D82, G21, L84, M15, O33)

Forecasting recoveries in debt collection: Debt collectors and information production

“…Drozd & Serrano‐Padial () further show that debt collection has a positive influence on credit supply. Several studies point in a similar direction.…”

“…One central paper underlying our argument is that of Drozd & Serrano‐Padial (), who argue that a crucial factor in the expansion of consumer credit in recent decades is improved information processing in the debt collection industry through the use of information technology. This improved information processing allows greater effort to be focused on debtors, who are then more likely to pay.…”

“…Credit scores () are a very important source of external credit assessments . Drozd & Serrano‐Padial () list the easier provision of credit scores as one factor in how information technology has made debt collection processes more efficient in recent decades. Dierkes, Erner, Langer, and Norden () study the importance of credit scores in assessing the default probability of small firms and find them to be essential.…”

“…Interestingly, recent theoretical work, such as that of Drozd & Serrano‐Padial (), suggests that debt collection plays an important role in gathering and processing debtor information. Fedaseyeu & Hunt () place stronger emphasis on reputational issues but note that debt collection agencies in particular gain information on a customer's willingness to pay.…”

Credit, Bankruptcy, and Aggregate Fluctuations

“…The theory we offer in this paper provides a rationale for why credit expands at the end of a recession. There are other papers that focus on expansion of unsecured credit and the rise of consumer default Tertilt (2010, 2016), Drozd and Serrano-Padial (2017) and Athreya, Tam, and Young (2012) to name a few), while we look at the cyclical fluctuations of these variables.…”