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

Abstract

We study the financial and labor market impacts of bad credit reports. Using difference-in-differences variation from the staggered removal of bankruptcy flags, we show that bankruptcy flag removal leads to economically large increases in credit limits and borrowing. Using administrative tax records linked to personal bankruptcy records, we estimate economically small effects 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