Modeling the Credit Card Revolution: The Role of Debt Collection and Informal Bankruptcy

Lukasz Drozd
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Lukasz Drozd: University of Pennsilvania

No 1076, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: We develop a model of credit card lending and consumer bankruptcy in which enforcement of debt repayment is endogenously determined within the lending industry. Our focus on enforcement of credit contracts is motivated by existing consumer debt collection practices, and is consistent with the recently documented informal nature of defaults on consumer debt. We show that our approach enhances the ability of standard models of consumer bankruptcy to account for the high levels of indebtedness and defaults seen in the US. Our model also explains why progress in information technology within the credit card industry has lead to growing riskiness of credit card debt over the 90s -- a feature of the data that is puzzling from the perspective of the standard theories.

Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed013:1076

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