Modeling the Revolving Revolution: Debt Collection Channel

Supersedes Working Paper 13-12 - Modeling the Credit Card Revolution: The Role of Debt Collection and Informal Bankruptcy

They 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. The authors' 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.