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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. Kyle F. Herkenhoff, 2012. "Informal unemployment insurance and labor market dynamics," Working Papers 2012-057, Federal Reserve Bank of St. Louis.
    2. 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.
    3. 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".
    4. Xuan Tam & Eric Young & Kartik Athreya, 2013. "A Quantitative Theory of Credit Scoring," 2013 Meeting Papers 382, Society for Economic Dynamics.
    5. Kartik Athreya & Ahmet Akyol, 2009. "Credit and self-employment," Working Paper 09-05, Federal Reserve Bank of Richmond.
    6. David K. Musto & Nicholas Souleles, 2005. "A portfolio view of consumer credit," Working Papers 05-25, Federal Reserve Bank of Philadelphia.
    7. Chen, Daphne & Corbae, Dean, 2011. "On the welfare implications of restricting bankruptcy information," Journal of Macroeconomics, Elsevier, vol. 33(1), pages 4-13, March.
    8. Song Han & Geng Li, 2011. "Household Borrowing after Personal Bankruptcy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 491-517, 03.
    9. 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.
    10. 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.
    11. 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.
    12. 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.
    13. 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.
    14. 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.
    15. Marieke Bos & Leonard Nakamura, 2012. "Should defaults be forgotten? Evidence from legally mandated removal," Working Papers 12-29, Federal Reserve Bank of Philadelphia.

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