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What Happens When Information Leaves a Market? Evidence from Postbankruptcy Consumers

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  • David K. Musto

    (University of Pennsylvania)

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    Abstract

    Federal law mandates the removal of personal bankruptcies from credit reports after 10 years. The removal's effect is market efficiency in reverse. The short-term effect is a spurious boost in apparent creditworthiness, especially for the more creditworthy bankrupts, delivering a substantial increase in both credit scores and the number and aggregate limit of bank cards. The longer-term effect is lower scores and higher delinquency than initial full-information scores predict. These findings relate to both the debate over the bankruptcy code and the wisdom of influencing market clearing by removing information.

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    Bibliographic Info

    Article provided by University of Chicago Press in its journal Journal of Business.

    Volume (Year): 77 (2004)
    Issue (Month): 4 (October)
    Pages: 725-748

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    Handle: RePEc:ucp:jnlbus:v:77:y:2004:i:4:p:725-748

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    Web page: http://www.journals.uchicago.edu/JB/

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    Cited by:
    1. David K. Musto & Nicholas S. Souleles, 2005. "A Portfolio View of Consumer Credit," NBER Working Papers 11735, National Bureau of Economic Research, Inc.
    2. Piero Gottardi & Ronel Elul, 2007. "Bankruptcy: Is It Enough to Forgive or Must we Also Forget?," Working Papers 2007_23, Department of Economics, University of Venice "Ca' Foscari".
    3. Mathur, Aparna, 2013. "Beyond bankruptcy: Does the US bankruptcy code provide a fresh start to entrepreneurs?," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4198-4216.
    4. Gerardi, Kristopher & Herkenhoff, Kyle F. & Ohanian, Lee E. & Willen, Paul S., 2013. "Unemployment, negative equity, and strategic default," Working Paper 2013-04, Federal Reserve Bank of Atlanta.
    5. Xuan Tam & Eric Young & Kartik Athreya, 2013. "A Quantitative Theory of Credit Scoring," 2013 Meeting Papers 382, Society for Economic Dynamics.
    6. Borghan Nezami Narajabad, 2012. "Information Technology and the Rise of Household Bankruptcy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(4), pages 526-550, October.
    7. Julapa Jagtiani & Wenli Li, 2013. "Credit access and credit performance after consumer bankruptcy filing: new evidence," Working Papers 13-24, Federal Reserve Bank of Philadelphia.
    8. Kyle F. Herkenhoff, 2012. "Informal unemployment insurance and labor market dynamics," Working Papers 2012-057, Federal Reserve Bank of St. Louis.
    9. Ethan Cohen-Cole & Burcu Duygan-Bump & Judit Montoriol-Garriga, 2009. "Forgive and forget: who gets credit after bankruptcy and why?," Risk and Policy Analysis Unit Working Paper QAU09-2, Federal Reserve Bank of Boston.
    10. Chintal Desai & Andre Mollick, 2014. "On Consumer Credit Outcomes in the U.S.-Mexico Border Region," Journal of Financial Services Research, Springer, vol. 45(1), pages 91-115, February.
    11. Marieke Bos & Leonard Nakamura, 2012. "Should defaults be forgotten? Evidence from legally mandated removal," Working Papers 12-29, Federal Reserve Bank of Philadelphia.
    12. Song Han & Geng Li, 2009. "Household borrowing after personal bankruptcy," Finance and Economics Discussion Series 2009-17, Board of Governors of the Federal Reserve System (U.S.).
    13. Chen, Daphne & Corbae, Dean, 2011. "On the welfare implications of restricting bankruptcy information," Journal of Macroeconomics, Elsevier, vol. 33(1), pages 4-13, March.
    14. Cohen-Cole, Ethan & Duygan-Bump, Burcu & Montoriol-Garriga, Judit, 2013. "Who gets credit after bankruptcy and why? An information channel," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5101-5117.

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