Credit status and productivity

Many employers screen new hires by examining the credit reports of job applicants. The practice has sparked debate, with opponents asserting that it amounts to discrimination and proponents maintaining that it is an important tool for employers to assure the quality of new employees. To date, little evidence exists on the validity of credit status as a screening device. The issue is complicated by the potential endogeneity of credit measures to labor market outcomes. This paper develops a typology of employer beliefs and a unique identification strategy to test whether credit status is predictive of employee productivity. The paper finds that the character-related portion of credit status is not a significant predictor of worker productivity.

Source.  

Credit Restrictions (Rural India)

India imposes caps on lending rates in rural areas and forbids lenders from discriminating across small borrowers. We study the impact of this regulation on household outcomes, particularly the use of capital and child labor. To do so, we first build a model economy that replicates outcomes from a survey of Indian households, in particular with respect to lending rates, the use of informal moneylenders, and child labor. Then we remove the lending regulation and find that the formal sector can then fully serve the loan demand at rates that are lower than those charged by informal moneylenders. This increases the loan mass, particularly for low-risk borrowers, and thanks to the increased use of capital, improves adult wages and human capital sufficiently to cover subsistence consumption and thus avoid child labor. Consumption is 25% larger and welfare, as measured by consumption equivalents, is improved by 59%.

From the new working paper "Loan Regulation and Child Labor in Rural India," by Dasgupta & Zimmermann (October 2012). 

Guatemala paper of the day

. . . [M]igrants are 12% less likely to have a loan, although they are no less likely to have applied for one. Since only approximately 13.4% of household heads have applied for loans, these effects are very large and suggest that being a migrant is associated with a dramatic reduction in the likelihood of obtaining a loan when applying for one.

The paper studies credit rationing towards migrants within Guatemala.  
Policy implications:

Strengthening contract enforcement and creditor rights poses challenges. Even in the context of weak enforcement of debt contracts, information sharing among lenders can be used to incentivize borrowers to repay their loans. In 2001, with the support of the World Bank Group, TransUnion opened the first credit bureau in Guatemala. Nonetheless, as of 2009, only approximately 28% of the country’s adult population was covered by the bureau (as reported by the IFC’s Doing Business website). New investments in information sharing infrastructure in other developing countries are being pursued with similar fanfare, but the implementation of these systems remains uneven and challenging. This research suggests that further attention by policymakers should be devoted to the design and implementation of these systems.

That is from the paper "Informational Barriers to Credit for Migrants: Evidence from Guatemala." Draft, October 2010; published in the latest number of Economic Development and Cultural Change (April 2012).