The Costs and Benefits of Employer Credit Checks

Andy Glover and P. Dean Corbae

No 447, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: Credit agencies sell credit reports to employers for use in hiring. We build a model that rationalizes these products through adverse selection in credit and labor markets. Workers differ in their patience, with more patient workers repaying debts more frequently and accu- mulating more human capital. In equilibrium, a better credit history correlates with higher productivity. A poverty trap may arise: an unemployed agent with a low credit score has a low job finding rate, but cannot improve her credit score without a job. A policy that bans employer credit checks must balance their benefits (labor market effi- ciency and improved credit repayment incentives) against their costs (idiosyncratic poverty trap risk).

Date: 2017
New Economics Papers: this item is included in nep-dge
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