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Bad Credit, No Problem? Credit and Labor Market Consequences of Bad Credit Reports

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Listed:
  • Will Dobbie
  • Paul Goldsmith-Pinkham
  • Neale Mahoney
  • Jae Song

Abstract

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 7 years, to changes for Chapter 7 filers, whose personal bankruptcy flags are removed from credit reports after 10 years. Using credit bureau data, we show that the removal of a Chapter 13 bankruptcy flag leads to a large increase in credit scores, and an economically significant increase in credit card balances and mortgage borrowing. We study labor market effects using administrative tax records linked to personal bankruptcy records. In sharp contrast to the credit market effects, we estimate a precise zero effect of flag removal on employment and earnings outcomes. We conclude that credit reports are important for credit market outcomes, where they are the primary source of information used to screen applicants, but are of limited consequence for labor market outcomes, where employers rely on a much broader set of screening mechanisms.

Suggested Citation

  • Will Dobbie & Paul Goldsmith-Pinkham & Neale Mahoney & Jae Song, 2016. "Bad Credit, No Problem? Credit and Labor Market Consequences of Bad Credit Reports," NBER Working Papers 22711, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:22711
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    References listed on IDEAS

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    13. Tal Gross & Matthew J. Notowidigdo & Jialan Wang, 2016. "The Marginal Propensity to Consume Over the Business Cycle," NBER Working Papers 22518, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Kristle Romero Cortes & Andrew Glover & Murat Tasci, 2016. "The Unintended Consequences of Employer Credit Check Bans on Labor and Credit Markets," Working Papers 201625R2, Federal Reserve Bank of Cleveland.
    2. Kristle Romero Cortes & Andrew Glover & Murat Tasci, 2019. "The Unintended Consequences of Employer Credit Check Bans for Labor Markets," Working Papers 201905, Federal Reserve Bank of Cleveland.
    3. Kyle Herkenhoff, 2016. "The Impact of Consumer Credit Access on Employment, Earnings and Entrepreneurship," 2016 Meeting Papers 781, Society for Economic Dynamics.
    4. Luojia Hu & Xing Huang & Andrei Simonov, 2020. "Credit Score Doctors," Working Paper Series WP 2020-07, Federal Reserve Bank of Chicago.
    5. Will Dobbie & Jae Song, 2016. "Debt Relief or Debt Restructuring? Evidence from an Experiment with Distressed Credit Card Borrowers," Working Papers 599, Princeton University, Department of Economics, Industrial Relations Section..
    6. Marieke Bos & Emily Breza & Andres Liberman, 2018. "The Labor Market Effects of Credit Market Information," Review of Financial Studies, Society for Financial Studies, vol. 31(6), pages 2005-2037.
    7. Cox, James C. & Kreisman, Daniel & Dynarski, Susan, 2020. "Designed to fail: Effects of the default option and information complexity on student loan repayment," Journal of Public Economics, Elsevier, vol. 192(C).
    8. Cahn, Christophe & Girotti, Mattia & Landier, Augustin, 2021. "Entrepreneurship and information on past failures: A natural experiment," Journal of Financial Economics, Elsevier, vol. 141(1), pages 102-121.
    9. Sarah Miller & Cindy K. Soo, 2018. "Do Neighborhoods Affect Credit Market Decisions of Low-Income Borrowers? Evidence from the Moving to Opportunity Experiment," NBER Working Papers 25023, National Bureau of Economic Research, Inc.
    10. Ballance, Joshua & Clifford, Robert & Shoag, Daniel, 2020. "“No more credit score”: Employer credit check bans and signal substitution," Labour Economics, Elsevier, vol. 63(C).
    11. Will Dobbie & Jae Song, 2017. "Targeted Debt Relief and the Origins of Financial Distress: Experimental Evidence from Distressed Credit Card Borrowers," NBER Working Papers 23545, National Bureau of Economic Research, Inc.

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    More about this item

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • J71 - Labor and Demographic Economics - - Labor Discrimination - - - Hiring and Firing
    • K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law
    • K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law

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