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

50 Pages Posted: 23 Apr 2013

See all articles by Lukasz A. Drozd

Lukasz A. Drozd

University of Pennsylvania - The Wharton School

Ricardo Serrano-Padial

Drexel University, School of Economics

Date Written: April 21, 2013

Abstract

In the data, most consumer defaults on unsecured credit are informal and the lending industry devotes significant resources to debt collection. We develop a new theory of credit card lending that takes these two features into account. The two key elements of our model are moral hazard and costly state verification that relies on the use of information technology. We show that the model gives rise to a novel channel through which IT progress can affect outcomes in the credit markets, and argue that this channel can be critical to understand the trends associated with the rapid expansion of credit card borrowing in the 1980s and over the 1990s. Independently, the mechanism of the model helps reconcile high levels of defaults and indebtedness observed in the US data.

Keywords: credit cards, consumer credit, unsecured credit, revolving credit, informal bankruptcy, debt collection, moral hazard

JEL Classification: D1, D8, G2

Suggested Citation

Drozd, Lukasz A. and Serrano-Padial, Ricardo, Modeling the Credit Card Revolution: The Role of Debt Collection and Informal Bankruptcy (April 21, 2013). FRB of Philadelphia Working Paper No. 13-12, Available at SSRN: https://ssrn.com/abstract=2255019 or http://dx.doi.org/10.2139/ssrn.2255019

Lukasz A. Drozd (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Ricardo Serrano-Padial

Drexel University, School of Economics ( email )

3220 Market St
Philadelphia, PA 19104
United States

HOME PAGE: http://www.serrano-padial.com

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