I examine the role of third-party debt collectors in consumer credit markets. Using law enforcement as an instrument for the number of debt collectors, I find that higher density of debt collectors increases the supply of unsecured credit. A one-percent change in the number of debt collectors per capita leads to a 0.49% change in the average credit card balance and a 1.32% change in the average balance on non-credit card unsecured loans. There is also some evidence that creditors substitute unsecured credit for secured credit when the number of debt collectors increases. Higher density of debt collectors improves recoveries, which enables lenders to extend more credit. Finally, creditors charge higher interest rates and lend to a larger pool of borrowers when the density of debt collectors increases, presumably because better collections enable them to extend credit to riskier applicants.
Despite their large size, retail credit markets have received relatively little attention in the academic literature.1 Even less effort has been devoted to studying the role of creditor rights in those markets. Aghion and Bolton (1992), Bolton and Scharfstein (1990), and Hart and Moore (1998) show that debt contracts are robust financial instruments if investors are assigned control rights contingent on debtors’ payments. In retail credit markets, however, consumer protection laws restrict the range of options available to creditors. Providers of consumer credit never have full access to debtors’ assets, and especially to their most valuable asset — human capital.
2 Even the threat of withdrawal of future financing from defaulting borrowers seems weak, as Cohen-Cole, Duygan-Bump, and Montoriol-Garriga (2009) document that consumers regain access to unsecured credit remarkably soon after filing for bankruptcy. In this paper, I examine a mechanism of creditor protection endemic to retail credit markets: third-party debt collectors. They ensure that defaulted debts will not go away easily, in effect enforcing creditor rights after default.
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Debt Collection Agencies and the Supply of Consumer Credit
