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Can Employer Credit Checks Create Poverty Traps?

Author

Listed:
  • 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.

Suggested Citation

  • Dean Corbae & Andrew Glover & Daphne Chen, 2013. "Can Employer Credit Checks Create Poverty Traps?," 2013 Meeting Papers 875, Society for Economic Dynamics.
  • Handle: RePEc:red:sed013:875
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    File URL: https://economicdynamics.org/meetpapers/2013/paper_875.pdf
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    References listed on IDEAS

    as
    1. Per Krusell & Toshihiko Mukoyama & Ayşegül Şahin, 2010. "Labour-Market Matching with Precautionary Savings and Aggregate Fluctuations," Review of Economic Studies, Oxford University Press, vol. 77(4), pages 1477-1507.
    2. Kartik Athreya & Xuan S. Tam & Eric R. Young, 2012. "A Quantitative Theory of Information and Unsecured Credit," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(3), pages 153-183, July.
    3. 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.
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    Cited by:

    1. Dokko, Jane & Li, Geng & Hayes, Jessica, 2015. "Credit Scores and Committed Relationships," Finance and Economics Discussion Series 2015-81, Board of Governors of the Federal Reserve System (U.S.).
    2. Kyle Herkenhoff & Gordon Phillips & Ethan Cohen-Cole, 2016. "The Impact of Consumer Credit Access on Employment, Earnings and Entrepreneurship," NBER Working Papers 22846, National Bureau of Economic Research, Inc.
    3. Daphne Chen & Jake Zhao, 2017. "The Impact of Personal Bankruptcy on Labor Supply Decisions," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 26, pages 40-61, October.
    4. Jesse Bricker & Geng Li, 2017. "Credit Scores, Social Capital, and Stock Market Participation," Finance and Economics Discussion Series 2017-008, Board of Governors of the Federal Reserve System (U.S.).

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