74 Pages Posted: 28 Sep 2016 Last revised: 27 Apr 2017
Date Written: April 18, 2017
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 limits and economically significant increases in credit card and mortgage borrowing. Using administrative tax records linked to personal bankruptcy records, we estimate a precise zero effect of flag removal on employment and earnings outcomes. We rationalize these contrasting results by showing that, conditional on basic observables, "hidden" bankruptcy flags are strongly correlated with adverse credit market outcomes but have no predictive power for labor market outcomes.
Keywords: Credit Reports, Borrowing, Labor Market, Bankruptcy
JEL Classification: G28, J23, J70, K31, K35
Suggested Citation: Suggested Citation
Dobbie, Will and Goldsmith-Pinkham, Paul and Mahoney, Neale and Song, Jae, Bad Credit, No Problem? Credit and Labor Market Consequences of Bad Credit Reports (April 18, 2017). Kreisman Working Papers Series in Housing Law and Policy No. 42. Available at SSRN: https://ssrn.com/abstract=2844316