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

We study the financial and labor market impacts of bad credit reports. Using difference-indifferences variation from the staggered removal of bankruptcy flags, we show that bankruptcy flag removal leads to a large increase in credit limits and economically significant increases in 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.