Do Consumers Strike Bad Deals with Debt Collectors? Evidence from Out-of-Court Settlements

43 Pages Posted: 24 Jan 2019 Last revised: 31 Jan 2019

See all articles by Ing-Haw Cheng

Ing-Haw Cheng

Dartmouth College - Tuck School of Business

Felipe Severino

Dartmouth College - Tuck School of Business

Richard Townsend

University of California, San Diego (UCSD) - Rady School of Management

Date Written: January 14, 2019

Abstract

We test whether consumers negotiating with debt collectors agree to “bad deals” that are worse than their outside option. We examine new data on civil lawsuits where consumers can either settle with collectors or exercise their outside option to go to court. Random assignment of judges with different styles generates exogenous variation in the likelihood of negotiation. Using linked credit registry data, we find evidence that settlements cause increased financial distress, without benefiting consumers through improved access to credit, collector concessions, or avoidance of uncertainty. Consumers experience more financial distress when making deals with highly experienced collectors. Overall, the evidence suggests that consumers are prone to strike bad deals with debt collectors.

Keywords: debt collection, negotiation, financial settlements

JEL Classification: D14, D18, G00

Suggested Citation

Cheng, Ing-Haw and Severino, Felipe and Townsend, Richard, Do Consumers Strike Bad Deals with Debt Collectors? Evidence from Out-of-Court Settlements (January 14, 2019). Available at SSRN: https://ssrn.com/abstract=3312448 or http://dx.doi.org/10.2139/ssrn.3312448

Ing-Haw Cheng (Contact Author)

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

Felipe Severino

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

HOME PAGE: http://www.dartmouth.edu/~fseverino

Richard Townsend

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

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