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

74 Pages Posted: 28 Sep 2016 Last revised: 27 Apr 2017

Will Dobbie

Princeton University

Paul Goldsmith-Pinkham

Federal Reserve Banks - Federal Reserve Bank of New York

Neale Mahoney

University of Chicago Booth School of Business; National Bureau of Economic Research (NBER)

Jae Song

U.S. Social Security Administration

Multiple version iconThere are 3 versions of this paper

Date Written: April 18, 2017

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 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

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

Will Dobbie

Princeton University ( email )

Paul Goldsmith-Pinkham

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Neale Mahoney (Contact Author)

University of Chicago Booth School of Business ( email )

5807 South Woodlawn Ave
Chicago, IL 60637
United States
773.702.9278 (Phone)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jae Song

U.S. Social Security Administration ( email )

Washington, DC 20254
United States
202-358-6403 (Phone)
202-358-6192 (Fax)

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