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
Date Written: January 14, 2019
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: Suggested Citation