Chatterjee, Satyajit;
Corbae, Dean;
Dempsey, Kyle;
Ríos-Rull, José-Víctor;
(2023)
A Quantitative Theory of the Credit Score.
Econometrica
, 91
(5)
pp. 1803-1840.
10.3982/ecta18771.
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Abstract
What is the role of credit scores in credit markets? We argue that it is, in part, the market's assessment of a person's unobservable type, which here we take to be patience. We postulate 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. 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 individuals' credit scores. We conduct counterfactuals to assess how more or less information used in scoring individuals affects outcomes and welfare. If tracking of individual credit actions is outlawed, poor young adults of low type benefit from subsidization by high types despite facing higher interest rates arising from lower dynamic incentives to repay.
| Type: | Article |
|---|---|
| Title: | A Quantitative Theory of the Credit Score |
| Open access status: | An open access version is available from UCL Discovery |
| DOI: | 10.3982/ecta18771 |
| Publisher version: | https://doi.org/10.3982/ecta18771 |
| Language: | English |
| Additional information: | © 2023 The Authors. Econometrica published by John Wiley & Sons Ltd on behalf of The Econometric Society. Dean Corbae is the corresponding author on this paper. This is an open access article under the terms of the Creative Commons Attribution-NonCommercial License (https://creativecommons.org/licenses/by-nc/4.0/). |
| UCL classification: | UCL UCL > Provost and Vice Provost Offices > UCL SLASH UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics |
| URI: | https://discovery.ucl.ac.uk/id/eprint/10214415 |
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