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Can Employer Credit Checks Create Poverty Traps?

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  • Dean Corbae

    (University of Wisconsin)

  • Andrew Glover

    (University of Texas at Austin)

  • Daphne Chen

    (Florida State University)

Abstract

According to a Survey by the Society for Human Resource Man- agement (2010), 60% of human resource representatives interviewed in 2009 indicated that the companies they worked for ran credit checks on potential employees. In this paper, we explore how credit checks (observable signals based on an agent’s unobservable type) may af- fect outcomes in a matching model of the labor market. We show that it may be individually optimal for employers to use such signals to make hiring/firing/compensation decisions. Such decisions how- ever may have important implications for household welfare inducing a poverty trap. The analysis can shed light on the consequences of a law (the Equal Employment for All Act (H.R. 3149)) prohibiting the use of credit information in employment decisions which currently sits before Congress.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 875.

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Date of creation: 2013
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Handle: RePEc:red:sed013:875

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  1. Roger B. Myerson, 1982. "Two-Person Bargaining Problems with Incomplete Infonnation," Discussion Papers 527, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. John Kennan, 2005. "Private Information, Wage Bargaining and Employment Fluctuations," 2005 Meeting Papers 555, Society for Economic Dynamics.
  3. Robert Shimer, 2005. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies," American Economic Review, American Economic Association, vol. 95(1), pages 25-49, March.
  4. Bjoern Bruegemann & Giuseppe Moscarini, 2010. "Rent Rigidity, Asymmetric Information, and Volatility Bounds in Labor," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(3), pages 575-596, July.
  5. Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 397-415, July.
  6. Mark Bils & Yongsung Chang & Sun-Bin Kim, 2011. "Worker Heterogeneity and Endogenous Separations in a Matching Model of Unemployment Fluctuations," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(1), pages 128-54, January.
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