Identity Theft as a Teachable Moment

Abstract

SUPERCEDES 14-28. This paper examines how a negative shock to the security of personal finances due to severe identity theft changes consumer credit behavior. Using a unique data set of linked consumer credit data and alerts indicating identity theft, we show that the immediate effects of fraud on consumers are typically negative, small, and transitory. After those immediate effects fade, identity theft victims experience persistent, positive changes in credit characteristics, including improved risk scores (indicating lower default risk). We argue that these changes are consistent with increased salience of credit file information to the consumer at the time of severe identity theft.

Keywords: inattention, salience, identity theft, extended fraud alert, risk score, consumer protection, credit reports, Fair and Accurate Credit Transactions Act (FACTA)

JEL Classification: D14, D18, G02