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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)

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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  • David K. Musto, 2004. "What Happens When Information Leaves a Market? Evidence from Postbankruptcy Consumers," The Journal of Business, University of Chicago Press, vol. 77(4), pages 725-748, October.
  • Handle: RePEc:ucp:jnlbus:v:77:y:2004:i:4:p:725-748
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