The Value of a Good Credit Reputation: Evidence from Credit Card Renegotiations

Coauthor(s): Liberman, Andres
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Abstract
Credit reputation, defined as the information on debt repayment available on credit bureaus, sustains uncollateralized consumer credit markets. This paper exploits a natural experiment within a large department store in Chile to quantify how much borrowers are willing to pay for a temporary good credit reputation. The store offered its delinquent borrowers whose outstanding balance was higher than an arbitrary cutoff a renegotiation that reduced the monthly payment due, lowering the price of a temporary good credit reputation. Using a fuzzy regression discontinuity design that compares borrowers on both sides of the cutoff, I find that renegotiation causally increases repayment by a sizeable 29% of the initial balance. The good credit reputation is temporary, lasting 8 months on average, and it is valuable because it allows borrowers to increase their leverage from other formal lenders, banks. Ex post, borrowers above the cutoff are more likely to default on their bank debt, suggesting that the bilateral renegotiation between the store and borrower imposes an informational externality on other lenders by reducing the precision of reputation as a signal of creditworthiness.