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

64 Pages Posted: 10 Oct 2016

See all articles by Will Dobbie

Will Dobbie

Princeton University

Paul S. Goldsmith-Pinkham

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 2 versions of this paper

Date Written: October 2016

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.

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Suggested Citation

Dobbie, Will and Goldsmith-Pinkham, Paul S. and Mahoney, Neale and Song, Jae, Bad Credit, No Problem? Credit and Labor Market Consequences of Bad Credit Reports (October 2016). NBER Working Paper No. w22711. Available at SSRN: https://ssrn.com/abstract=2850226

Will Dobbie (Contact Author)

Princeton University ( email )

Paul S. Goldsmith-Pinkham

Federal Reserve Bank of New York ( email )

NY
United States

HOME PAGE: http://paulgp.github.io

Neale Mahoney

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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