Authors: Will Dobbie, Paul Goldsmith-Pinkham, Neale Mahoney, and Jae Song
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The New York Innovation Center bridges the worlds of finance, technology, and innovation and generates insights into high-value central bank-related opportunities.
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Staff Reports
Bad Credit, No Problem? Credit and Labor Market Consequences of Bad Credit Reports
October 2016 Number 795
Revised May 2017
Revised May 2017
JEL classification: D14, J0, G0
Credit reports are used in nearly all consumer lending decisions and, increasingly, in hiring decisions in the labor market, but the impact of a bad credit report is largely unknown. We study the effects of credit reports on financial and labor market outcomes using a difference-in-differences research design that compares changes in outcomes over time for Chapter 13 filers, whose personal bankruptcy flags are removed from credit reports after seven years, to changes for Chapter 7 filers, whose personal bankruptcy flags are removed from credit reports after ten years. Using credit bureau data, we show that the removal of a Chapter 13 bankruptcy flag leads to a large increase in credit limits and economically significant increases in credit card and mortgage borrowing. Using administrative tax records linked to personal bankruptcy records, we estimate a precise zero effect of flag removal on employment and earnings outcomes. We rationalize these contrasting results by showing that, conditional on basic observables, “hidden” bankruptcy flags are strongly correlated with adverse credit market outcomes but have no predictive power for labor market outcomes.
73 pages / 1.33 mbTools
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