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Can Credit Market Signalling Improve Labor Market Outcomes?

Author

Listed:
  • Dean Corbae'

    (University of Texas at Austin)

  • Tzu-Ying Chen

    (University of Texas at Austin)

Abstract

According to a Survey by the Society for Human Resource Management, 25% of human resource representatives interviewed in 1998 indicated that the companies they worked for ran credit checks on potential employees while the fraction increased to 43% in 2004. In this paper, we explore how such credit checks (information on observable credit market actions) might help separate workers with heterogeneous unobservable productivity. Ever since Spence [7], we've known that observable actions which are correlated with unobservable productivities can be used to separate workers. We show by means of example that if the number of observable actions in the education market is smaller than the number of unobservable types, then it might be efficient for employers to include observable credit market actions in their Bayesian assessment of worker type. We then assess the welfare consequences of a law (the Equal Employment for All Act (H.R. 3149)) prohibiting the use of credit information in employment decisions which currently sits before Congress.

Suggested Citation

  • Dean Corbae' & Tzu-Ying Chen, 2010. "Can Credit Market Signalling Improve Labor Market Outcomes?," 2010 Meeting Papers 685, Society for Economic Dynamics.
    • Handle: RePEc:red:sed010:685
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    References listed on IDEAS

    as
    1. Kelly Bedard, 2001. "Human Capital versus Signaling Models: University Access and High School Dropouts," Journal of Political Economy, University of Chicago Press, vol. 109(4), pages 749-775, August.
    2. Spence, Michael, 1974. "Competitive and optimal responses to signals: An analysis of efficiency and distribution," Journal of Economic Theory, Elsevier, vol. 7(3), pages 296-332, March.
    3. Hendel, Igal & Shapiro, Joel & Willen, Paul, 2005. "Educational opportunity and income inequality," Journal of Public Economics, Elsevier, vol. 89(5-6), pages 841-870, June.
    4. Hanming Fang, 2006. "Disentangling The College Wage Premium: Estimating A Model With Endogenous Education Choices," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 47(4), pages 1151-1185, November.
    5. Chatterjee, Satyajit & Corbae, Dean & Ríos-Rull, José-Víctor, 2008. "A finite-life private-information theory of unsecured consumer debt," Journal of Economic Theory, Elsevier, vol. 142(1), pages 149-177, September.
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