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A Quantitative Theory of the Credit Score

Satyajit Satyajit, P. Dean Corbae, Kyle Dempsey and José-Víctor Ríos-Rull
Additional contact information
Satyajit Satyajit: Federal Reserve Bank of Philadelphia
Kyle Dempsey: Ohio State University

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

Abstract: What is the role of credit scores in credit markets? We argue that it is a stand in for a market assessment of a person’s unobservable type (which here we take to be patience). We pose a model of persistent hidden types where observable actions shape the public assessment of a person’s type via Bayesian updating. We show how dynamic reputation can incentivize repayment without monetary costs of default beyond the administrative cost of filing for bankruptcy. Importantly we show how an economy with credit scores implements the same equilibrium allocation. We estimate the model using both credit market data and the evolution of individual’s credit scores. We find a 3% di?erence in patience in almost equally sized groups in the population with significant turnover and a shift towards becoming more patient with age. If tracking of individual credit actions is outlawed, the benefits of bankruptcy forgiveness are outweighed by the higher interest rates associated with lower incentives to repay.

Keywords: Credit Scores; Unsecured Consumer Credit; Bankruptcy; Persistent Private Information (search for similar items in EconPapers)
JEL-codes: D82 E21 G51 (search for similar items in EconPapers)
Pages: 70 pages
Date: 2020-07-01
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Citations: View citations in EconPapers (9)

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Related works:
Journal Article: A Quantitative Theory of the Credit Score (2023) Downloads
Working Paper: A Quantitative Theory of the Credit Score (2020) Downloads
Working Paper: A Quantitative Theory of the Credit Score (2020) Downloads
Working Paper: A Quantitative Theory of the Credit Score (2020) Downloads
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