The Labor Market Effects of Credit Information, Review of Financial Studies, Forthcoming.
Coauthors: Andres Liberman and Emily Breza.
Paper | NBER Working Paper | Abstract
We exploit a natural experiment to provide one of the first measurements of the causal effect of negative credit information on employment and earnings. We estimate that one additional year of negative credit information reduces employment by 3 percentage points and wage earnings by $1,000. In comparison, the decrease in credit is only one-fourth as large. Negative credit information also causes an increase in self-employment and a decrease in mobility. Further evidence suggests this cost of default is borne inefficiently by the relatively more creditworthy individuals among previous defaulters
1. Impulsive Consumption and Financial Wellbeing: Evidence from an Increase in the Availability of Alcohol (revision requested by the Review of Financial Studies)
Coauthor: Itzhak Ben-David.
Paper | NBER Working Paper |Abstract
Increased availability of temptation goods might harm individuals if they have time-inconsistent preferences and consume more in the present than planned before. We study this idea by examining the credit behavior of low-income households around the expansion of the opening hours of retail liquor stores during a nationwide experiment in Sweden. Consistent with store closures serving as commitment devices, expanded operating hours led to higher alcohol consumption (Nordström and Skog 2003) and greater consumer credit uptake and default. Thus, our results show that limiting the availability of temptation goods can improve the financial wellbeing of individuals with inconsistent-time preferences.
2. Bad Times, Good Credit. (submitted)
Coauthors: Bo Becker and Kasper Roszbach.
Banks’ limited knowledge about borrowers’ creditworthiness constitutes an important friction in credit markets. Is this friction deeper in recessions, thereby contributing to cyclical swings in credit? Alternatively, is the depth of this friction reduced in recessions, as tough times reveal information about firm quality? We test these alternative hypotheses using internal ratings data from a large, Swedish bank. This banks’ ability to sort borrowers by credit quality is best in recessions, and worst in good times. Our results suggest that information frictions are counter-cyclical in corporate credit markets.
2. Should Defaults Be Forgotten? (new version soon)
Coauthor: Leonard Nakamura.
The practice of penalizing consumers long after they have paid off their debts has sparked a debate on the length of time that defaults are retained in consumer credit records. By exploiting a quasi-experimental variation in this retention time, we investigate what happens when retention times are reduced. We find that the loss of information led banks to tighten their lending standards significantly. However this effect was partly offset by the positive shift in creditworthiness due to earlier deletion of past defaults and borrowers’ incentive to exert more effort in order to keep their good reputations. We cannot rule out that this reduction in retention time is optimal.
4. Economic Scarcity and Consumers’ Credit Choice (new version soon)
Coauthors: Chloe le Coq and Peter van Santen.
This paper documents that increased scarcity right before a payday causally impacts credit choices. Exploiting a transfer system that randomly assigns the number of days between paydays to Swedish social welfare recipients, we find that low-educated borrowers behave as if they are more present-biased when making credit choices during days when their budget constraints are exogenously tighter. As a result, their default risk and debt-servicing cost increase significantly. Access to mainstream credit or buffer stocks cannot explain our results. Our findings highlight that increased levels of economic
scarcity risk reinforcing the conditions of poverty.
5. Rationality in the Consumer Credit Market: Choosing between Alternative and Mainstream Credit. (submitted)
Coauthor: Sumit Agarwal.
In this paper we study whether consumers optimally choose between formal and informal credit, using a unique panel dataset with all registered information available on consumers’ behavior within the Swedish alternative and mainstream credit markets. Specifically, we analyze to what extent credit applications and existing credit lines at any mainstream financial institution influence the decision to take pawn credit. We find the likelihood of applying for pawn credit, on average, increases by 8.8 percent for those whose loan application was rejected by the regular bank. However, we also find that the lion’s share of pawn credit borrowers do not apply for mainstream (cheaper) credit before taking a pawn loan. The decision not to apply, however, turns out to be rational — we find that 93 percent of their loan applications would have been rejected had they applied for credit at a mainstream financial institution. Finally, we find evidence suggesting that immigrant pawn credit borrowers, are at least, equally well-informed about their chances to obtain mainstream regular credit as their Swedish born counterparts.
6. Peers, Credit Choice and Default (paper coming soon)
Coauthors Mats Levander and Erik von Schedvin.
7. The Pawn Industry and Its Customers: The United States and Europe.
Coauthors: Susan P. Carter and Paige M. Skiba.
As humankind’s oldest financial institution, pawnbroking has served the financial needs of low-income families for centuries. Recently, and especially in the last five years, an increasing number of consumers have relied on pawnbrokers to help them meet daily financial needs. Seven percent of all U.S. and four percent of all Swedish households have used pawn credit at one time or another. Despite the general public’s increased interest in the pawn industry, evidenced by the popularity of reality television shows like “Pawn Stars” and “Hard Core Pawn,” economists have paid surprisingly little attention to the pawnbroking industry and pawnshop borrowers. We start by reviewing the history of pawn credit and the sparse economic literature on pawnbroking, and then present unique U.S. transaction data and Swedish register data to, first, show aggregate trends, and, second, shed light on the social and financial background of pawnshop borrowers and their behavior within the pawnbroking industry in both countries. We find that the pawnbroking industry and pawnshop borrowers are unexpectedly similar in the United States and Sweden.
WORK IN PROGRESS
1. ADHD and Financial Wellbeing
Coauthor: Itzhak Ben-David.
2. Credit Information and labor Market Productivity
Coauthors: Emily Breza and Andres Liberman
3. Crime, Inequality, Credit Supply
Coauthors: Hamid Boustanifar and Geraldo Cerquiero
4. The Impact of Sharing Credit Information, Evidence from a Quasi-Experimental Variation
Coauthors: Paola Morales and Kasper Roszbach
Around the globe, credit bureaus restrict the length of time that negative credit information of firms can be retained. The large variance in retention times across industrialised countries illustrates the lack of consensus on the optimal memory of negative information. By exploiting a quasi-experimental variation in retention times for firms, provided by the introduction of the Habeas Data law in Colombia, we are able to analyse the causal link between the length of the credit bureaus retention time and the subsequent behavior by lenders and borrowers. The law was ratified in 2009 and prohibited institutions in Colombia to access the entire credit history of borrowers. Since then, the negative credit information is observable only for a period that depends on the length of the delinquency period. Our preliminary results, suggest that after the introduction of the Habeas Data law: i) firms are less likely to repay their loans and switch banks least often, and ii) banks grant loans with looser terms (lower interest rates, less collateral, longer maturities and higher loan amounts).
5. Lender Bidding and Smart Disclosure in Consumer Credit Markets.
Coauthors: Sumit Agarwal and Kasper Roszbach
1. Balancing Act: New Evidence and a Discussion of the Theory on the Rationality and Behavioral Anomalies of Choice in Credit Markets Coauthors: Susan Payne Carter and Paige Marta Skiba Forthcoming. In Research Handbook in Behavioral Law and Economics, eds., Joshua C. Teitelbaum and Kathryn Zeiler. London, UK: Edward Elgar Publishing, 2015.
2. Den Svenska Skulden, SNS Konjunkturrådets rapport 2015″ Coauthors: Bo Becker, Torbjörn Becker, Peter Englund and Pehr Wissén. ISBN: 9789186949655
3. Essays on Household Finance, November 2010, Stockholm University, ISBN: 978-91-7447-160-1. Opponent: Professor Luigi Guiso EIEF; examination committee Professor Paolo Sodini, Astrid Muren and Sten Åke Stenberg.